As a MBA aspirant, I had to make the pink papers my holy book. Being from a technical background, I could barely manage the first page without getting a headache. Comprehending the jargons was a big challenge. Now, after 4 years of my MBA, am trying to make a humble attempt in blogging about the Indian business news in a simple manner. It’s a naïve attempt from a beginner for all beginners and includes facts and analysis gathered from a multiple sources from www and some of my opinion.
The private airline strike threat was recently called off after government contemplated action. The pet peeve of the private airlines is the aviation fuel costs (40% of which are taxes) and airport charges. The strike was meant to ask government to reduce both. But reportedly not all private airlines were interested in the strike causing a divide in the full service airlines and low cost ones.
Performance-wise there is a stark contrast between the full service airlines and low cost ones.
The full service airlines are making the most losses. Kingfisher lost Rs 243 crore in the latest quarter ending June 2009, Jet Airways lost Rs 225 crore while budget carrier SpiceJet made Rs 26 crore of profits. As compared to the same period a year ago, Jet's revenue's are down 18 per cent while SpiceJet's are up 15 per cent.
Air India has a passenger load factor of 67.9 per cent, Jet Airways' is around the same and Kingfisher's is 72 per cent - SpiceJet, however, is 77.3, GoAir 85,1 and IndiGo 81.6 per cent (all figures for June 2009). That is, the budget airlines are getting in more passengers per flight. Since they have lower costs of flying, this means their costs per passenger seat are much lower than those of the full-service airline. Even in market share these airlines are doing better. Though Kingfisher and Jet have cut capacity, deferred deliveries, and decreased passenger routes, SpiceJet has done the opposite.
So even though the low cost airlines are facing the same situation as the full service ones, they are faring much better despite the high fuel costs. Also, the other argument of high airport charges doesn’t hold true as India has one of the lowest air port charges in the world.
The not so good monsoon in India, has pushed India into an impending food crisis. Not just India, but other developing and underdeveloped economies are also worried about the food crisis that may lead to food war in several countries. The world food prices have been climbing in most parts of the world despite a slowdown and saw a surge in 2008. The United Nations has pointed out that unlike previous price rise which were mainly driven by food shortages, the price spike came in 2008 when the world's farmers reaped a record grain crop. In countries like India, the food price hike draws more concern because the population spends a considerable part of their income on food and any increase affects them more than their developed countries counterpart.
Main reasons for global food prices hike in 2008
The main reason for global food crisis in 2008 has been contributed to increased use of food crops land for biofuel cultivation thus reducing the land available for food crops. George Bush also pointed out in 2008 that another main reason is increasing consumer demand in countries like India and China because of their prosperity. I also read an interesting article where it was mentioned that increasing non vegetarianism is also responsible for increased demand of food grains because more foodgrains are required to breed the cattle than the same proportion required for directly feeding the human beings. Also, the increased energy costs in 2008, led to increased transportation costs further fuelling price hike.
Current food situation in India
After enjoying a reliable monsoon for the past few years, this time the rain gods have decided to give a hard time to India. The country is facing drought like situation in many Northern and Eastern parts like North Gujarat, UP. And simultaneously is also facing floods in Western Gujarat, North Bihar etc. The rainfall is deficient in almost two third of the country and the Prime Minister has now called for an emergency meeting to stem the price rise. The impact of poor monsoon is that the entire paddy growing belt of West Bengal, Andhra Pradesh, UP, Bihar, Punjab, Chhattisgarh and Haryana has received either scanty or deficient rainfall or their maybe an impending shortfall of the Indian staple diet of rice and wheat.
The step that government is taking to stem this rise has also taken the form of a political debate. The state governments are vying with one another for drought assistance from Central government. The opposition party, BJP, has pointed out that, “In recent years 1.83 tons of wheat, 3.95 lakh tons of rice, 22,000 tons of paddy and a huge no of tonnes of maize was wasted or damaged in the various godowns of the Food Corporation of India (FCI)." Agricultural Minister Sharad Pawar has pegged this loss at 20% of the total turnover of FCI. This is a big amount to be wasted in the year of poor agriculture output.
The Impact of food crisis
Poor agricultural growth will not only increase food prices, but also slowdown the economic recovery of India. India is dependent on the rural market for taking its GDP to a growth trajectory and a poor crop will reduce the purchasing power in the hands of farmer which form a considerable part of the India’s population. Also, the contribution of agricultural industry to India’s GDP is substantial and any dip in it will bring down the overall GDP growth of India. Also, an increased household budget will give the Indian consumer decreased purchasing power as most of the income will be spent on food items. If the government doesn’t take necessary steps to deal with India’s dependency on monsoon in short term and long term, it will hamper India’s growth both in the current slowdown and in the long haul.
These days, one reads about disinvestment in almost every other business newspaper. It’s absence in the budget speech is supposed to be one of the main reasons why the Sensex tumbled after the announcement of Indian Budget 2009-10. Let’s try and figure what is the big deal about disinvestment in India.
About Disinvestment
In a layman’s term, it refers to the government selling its stake in a public sector unit. Government has a majority holding in all the public sector enterprises and it may sell this stake to another business entity or to the public. The argument for a disinvestment is that the government should exit out of business and should use the money generated through the sale for public welfare. The argument against disinvestment is especially from the Left parties, who argue that sectors like oil, gas, minerals, transport are of national interest and the government should not dilute their stake or try to privatize it. They are especially against strategic sale, which refers to the sale to another business entity, because the administration or ownership of the company will transfer to another entity. In case of selling shares to the public, the government still remains as the majority holder with atleast 51% stake in the company and will still be responsible for running the company.
What the Budget 2009-10 proposed?
In the Budget for 2009-10, the estimated proceeds for the entire year were Rs. 1,120 crore. This figure falls short by a great margin from what the Economic Survey, which is a pre-cursor to the Budget, had suggested. The Economic Survey proposed that the figure should be around Rs 25,000 crore per year.
After a few days, however, there are talks making the rounds that a few public sector units will come under the disinvestment scanner. This has helped in the upward movement of the stock exchange.
Government has also indicated that it will first dilute its stake in companies that are already listed and the public already has a stake in them. They will further reduce their holdings in such companies.
The government has not given a clear picture of any target regarding the disinvestment proceeds or for what purpose they will be used.
The way ahead
All eyes are on the list of Public sector units that might be disinvested and the shares of most probable companies have already shot up in the market. Whether the government will proceed with disinvestment depends on mainly 2 factors – politics and economics. Politics will determine the opposition that the government will face from within or its allies or the opposition for going ahead with disinvestment. Economics will determine how the market performs, how good the economic climate is for selling the shares and will the disinvestment fetch good returns in this kind of economic downturn.
Though TCS is the number one Indian IT company in terms of revenues, it often gets a poor treatment from the stock market compared to its rival Infosys, who is a darling of the stocks. Probably that’s why the markets were surprised to see good results from TCS, especially improvements in its operating margin and hence the profits. The stock market responded by saluting the IT behemoth with a 15% increase in it stock price, the highest for the company in the past one year. Below is a snapshot of the TCS results for the Apr-Jun09 quarter.
Net profit – quarter on quarter growth - +15% to Rs.1534 crore
Revenue – quarter on quarter growth - +0.5% to Rs. 7,207 crore.
You will notice that though the revenue has increased marginally, the profit has increased in double digits. This shows that TCS has implemented huge cost saving measures for bolstering up its operating margin and hence its profits. TCS is known for its lower operating margins compared to Infosys, a factor that results in Infosys showing healthier profits than TCS, even though TCS’ revenue may be higher. It looks like TCS has finally decided to take a hard look at its costs and is tightening its belt in these times of slowdown. It has reported cutting down on major costs like selling and administrative expenses and lowering of costs due to moving work offshore. Many TCSers will vouch for this as they have been facing the brunt of the massive cost cutting exercise taken up by the management.
Another factor that has helped TCS perform well in this quarter is reduced forex losses compared to last quarter. So, forex losses were brought down to Rs 84.1 crore from Rs 781 crore in the last quarter. TCS has also improved it revenue collection mechanism and has brought down the number of receivable days to 75, down from 86 a year ago. TCS customers include trouble auto companies like General Motor, Chrysler and investment banks like Lehman Brothers. Recovering receivables from such companies seem to have helped.
The rise in profit and operating margins maybe good news, but the company faces tough road ahead to increase its revenues. It has added only 26 clients in this quarter, down from 36 clients in last quarter and the total number of clients has also come down. So while this quarter may have fared well for TCS, the road ahead does not look smooth enough.
Not long ago, we had newspaper headlines highlighting the double digit inflation figures in India and then the world went upside down when it was a hit by a financial hurricane called Sub prime crisis. Today, we are faced with the daunting task of avoiding negative inflation. So what does inflation mean to a common man like you and me and if it is going down then doesn’t it mean good news for general public because goods will become cheaper. According to economic fundas that isn’t right and lets try and figure out why.
I
Inflation is generally referred as the increase in the general price level of a basket or goods and services. It’s different for different countries and for measuring India’s inflation, we have a basket of goods and services specific to India. Again, to make things more confusing for us, there are two baskets and each measure a different index termed as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). The headlines that we generally see refer to the WPI. Now, WPI gives less weightage to food which is the most important price for a developing country like India. Hence you may have a scenario like today when even though, the WPI is hovering near zero, the CPI index is higher as the food prices are high. Hence, to analyse the actual increase in prices, it’s important to study the different constituents of the index you are referring to.
Also, inflation is mainly seen caused due to an increase in demand of a basket of goods and services. Hence, if demand for rice increases or the supply of rice decreases due to poor crop, bad monsoon etc, the price of rice will increase. But it’s always not true. For understanding the inflation funda, we may look at it as a case of ‘too much money chasing too few goods.’ So while there will be inflation if the demand or supply of goods fluctuate but there also will be inflation if the demand or supply of money fluctuates. For example, if the government prints more money or there is an influx of more money in market due to foreign investments, then there will be more money to buy the same quantity of rice and again that will increase the price of rice.
Coming to the next point, that if inflation signifies an increase in general price level of a good then, why is deflation considered dangerous during these times of recession, because shouldn’t I be happy that I will be able to buy goods cheaper. In this case, we have to understand that inflation is caused due to and it impacts a variety of factors and hence it is important to view inflation with respect to the nation’s economy rather than a relation between you and the good’s price. During recession, the demand of goods fall as the income levels of people fall. If the price of goods fall, it means less profit for the industry that is making the goods, lesser salaries to their employees who in turn spend lesser money in market, thus depressing many other industries and hence, a nation’s economy as a whole. This is also the reason why a developing nation like India generally has a high inflation. Because of high growth, the demand of goods among people rises as people now have more purchasing power. Also, the industries start producing more and they start borrowing huge amounts of money from banks to expand their capacity, which results in less money with the banks, technically called the credit crunch and makes an example of too less money chasing more goods causing inflation.
Thus, inflation is related to a variety of factors and while understanding the simple logic of it, let’s leave it to the economists to rack their brains about its complexities.
The Group of Eight is a forum for governments of eight developed nations Canada, France, Germany, Italy, Japan, Russia, UK and USA. The Head of the states of the member countries meet annually in what is called the G8 summit. The responsibility of holding the G8 summit and the presidency of the group is on a rotational basis among the member states and this year it is with Italy.
About G-5
The 5 emerging economies include the Group of Five, Brazil, China, India, Mexico, South Africa. Several European countries are lobbying to include these in the G8 Summit. These countries currently participate as guests. The G14 is considered as G8+G5+Italy.
About G8 Summits
The G8 Summits generally talk and think about the current issues facing the world and what can be done about it like, the climate issues, world trade, terrorism etc. However, being an informal forum, it does not give out a well cut direction to solve the issues.
G-8 Summit 2009
The G-8 Summit 2009 is being held in Italy in L’aquila, the town recently hit by earthquake. The Summit is a 3 day long affair. The summit has suffered a setback as Chinese president Hu Jintao flew back to Beijing amid continuing unrest in the western region of Xinjiang as China is an important constituent of the discussions. The main topics discussed during the 3 days of Summit involved Climate changes, World Trade, global terrorism etc.
Discussions on Climate Change
G-8 has agreed to try to limit global warming to 2 degrees Celsius (3.6 Farenheit) above pre-industrial age levels (1900 levels) and pledged to cut their greenhouse gas emissions by 80 percent by 2050. But developing nations China and India have refused to reduce global greenhouse gas emissions by 50 per cent by 2050 unless they are given more financial assistance by G-8 countries. Also the developed countries have not given a clear cut path as to how they will be cutting down the emissions. The developing countries think that they have much low per capita emission than developed nations and their development should not be hampered by asking them to reduce their emissions.
What does India say on Climate change?
Indian negotiators said developing countries first wanted to see rich nation plans to provide financing to help them cope with ever more floods, heat waves, storms and rising sea levels. This has been a normal bone of contention between the developing and developed economies where developing economies say that why should they bear the brunt of what is an outcome of the doings of the industrialized nations as going for environmental friendly policies costs them more than the normal ones. The current state of climate change and greenhouse gas emissions is believed to be an outcome of the industrialization carried out in the developed economies that comprise the G-8 in the 50’s. The developed economies, on the other hand, say that, unless the merging economies too come together for bringing down their carbon gas emissions down, its not going to help the climate cause.
Obama on Climate change
US President Barack Obama said during the Summit that the world had made "important strides" towards arresting climate change by agreeing to limit warming, but UN chief Ban Ki-moon said it was simply not enough. Obama said that he understood China and India’s apprehensions in cutting their carbon footprint but also said that without measures taken by them the world climate target cannot be met.
Discussions on boosting food supplies
The G8 leaders have agreed to build new efforts to boost food supplies and have reportedly pledged $15 bn over three years for helping poor nations to develop their own agriculture. Out of this US will reportedly contribute $3.5 bn. However, various aid organizations have criticized the developed nations as they have not fulfilled their target of providing $25bn to Sub Saharan Africa by 2010.
Growth rate in 2008-09 dipped to 6.7 per cent from average 9 per cent growth in previous three fiscal years.
Fiscal deficit grew from 2.7 per cent to 6.8 per cent of GDP.
(Fiscal Deficit indicates the difference between the government’s revenue and expenditure. A positive fiscal deficit indicates that government’s expenditure is more than its revenue.)
Budget expenditure crosses Rs 10 LAKH crore for the first time.
Infrastructure Allocations
Allocation for National Highway project is up 23%.
(This should benefit the road construction and raw material industries like cement.)
Indian Infrastructure Financial Corporation Limited (IIFCL) to evolve financing mechanism for giving increased support to infrastructure projects. It will will re-finance commercial bank loans upto 60 per cent in critical projects through public private partnership to the tune of Rs 1,00,000 crore to raise investment in the sector.
Gram Sadak Yojana allocation has been hiked up 59% to Rs 12000 crore
Housing Schemes
Housing allocation hiked under Rajiv Awaas Yojana. Allocation for urban poor for provision for housing and basic amenities to be raised to Rs 3,973 crore in the current year.
Allocation for Jawaharlal Nehru Urban Renewal Mission increased by 87 per cent to Rs 12,887 crore.
Rs 2,000 crore for rural housing fund under National Housing Bank.
(This shall also benefit the housing construction and raw material industries)
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