Thursday, March 01, 2007

nightmare on wall street and dalal street

feb 28th, 2007

boy, this has been a bad couple of days! despite bernanke's soothing noises, the plunge in housing starts, the fallout from subprime mortgages, and the fact that shanghai sneezing now causes new york to sneeze -- is this the beginning of a recession?

and dalal street: a lousy budget indeed, including the IT sector being hit with taxes (AMT), and pretty much nothing being done to curb inflation, and strange things like mutual funds dividends being taxed at 25%! but a lot of funds went in did bottom fishing, and this should mean some recovery in the next couple of days. but i guess the sensex has fallen some 10+% this month. so with bond funds tanking based on inflation, and now stock funds also plunging, not clear where the investor can take refuge. cash is not a great idea either because of heavy inflation.

4 comments:

Ghost Writer said...

The issue with this government has been mismanagement of the 'fundamentals'.

1- Government spending is up, including planned expenditure; Boondoggles like Rural Employment Guarantee Schemes - thats is just absolute criminal pork barrel (ooops - that is haraam - I forgot!)

This is at the root of inflationary and interest rate pressure. It does not take a Harvard educated Chidambram to know that


2- I cannot believe these guys still think that increasing government expenditure is the way to education reform in India.

You want a real reform idea in this field? How about applying Friedman's concept of education vouchers - where government issues vouchers to parents that they can cash at a school of their choice? But no - I guess that would be too bad.
Bad - because everyone (and not just Muslims) will have claim to the nations resources.
Bad also because chances are most parents will cash these vouchers at Hindu educational institutions as opposed to Christian Missionary St. Francis Xavier schools!

3- For all the tall claims being made - there is nothing for agriculture in this budget. Extending banking credit is very noble (may prevent distress suicides) - but the whole issue in farming reform is opening it up to BIG private players who use economies of scale and bring in technology

That is too hard for this gang to do too.

The question is - do they have the balls to act on their beleifs

The answer is - NO

san said...

Here's the high-level analysis from Stratfor

India: A Warning to Congress from the North
February 28, 2007 20 46 GMT

Summary

India's ruling Congress party received a major wake-up call Feb. 27 when election results in the northern states of Punjab and Uttaranchal gave the main opposition Bharatiya Janata Party and its allies a victory over Congress. Though these elections will not seriously destabilize Congress' political standing in the central government in the near term, they represent a serious warning about the party's political future. Rising inflation rates, high commodity prices, an overheating economy and a move to open up India's retail sector to foreign investors carry worrying implications for Congress, while providing plenty of political ammunition for the recovering BJP.

Analysis

India's main opposition Bharatiya Janata Party (BJP) and its allies defeated the ruling Congress party in two out of three recent state elections, according to results released Feb. 27. The BJP and its allies won a clear majority over Congress in the northern agrarian state of Punjab and the northern Himalayan state of Uttaranchal, while Congress maintained a hold over the insurgent-ridden northeastern state of Manipur.

After suffering a series of political setbacks since Congress came to power in 2004, the BJP was quick to proclaim that the election results were the beginning of the end of Congress' rule at the center. Indian Prime Minister Manmohan Singh denied the results were a referendum on his government and said they would have no impact on the Congress-led United Progressive Alliance (UPA) governing coalition.

Though the results are unlikely to seriously threaten Congress' hold on the central government in the near future, the remaining two and a half years of the party's five-year term are bound to be rocky. Congress' defeat rests on a number of factors. First, anti-incumbency voting is a prevalent theme in India. Second, Congress party candidates and their allies have largely failed to take into account the complexities involved in local, caste-based politics in these states, and have suffered in the polls as a result. The most critical factor working against Congress, however, is the government's economic performance.

India's prime minister, an economist by trade, has largely failed in his attempts to push forward any meaningful economic policies to tame the country's rising inflation rate or to attract the necessary capital to improve India's productive capacity. The constraints Singh faces in implementing these policies are by no means trivial. As a fractured democracy that suffers from endemic corruption and a bloated bureaucracy, India will inevitably be restricted by the diverging political interests of the ruling party's coalition allies and state chief ministers, resulting in an overwhelming short-sightedness in economic policy.

But this does not mean the Congress party is able to escape the blame. The inflation rate in India reached a two-year high of 6.73 percent in February, surpassing the 5.5 percent ceiling the Reserve Bank of India attempted to impose. The steadily rising inflation rate has resulted in a sharp price increase in basic commodities prices that is felt by millions of average Indians when they go to the grocery store, pay their taxes or gas up their cars.

Rising food prices in India -- 10 percent higher in January 2007 than in the same month a year earlier -- also can be attributed to the country's sluggish agricultural sector, which accounts for a fifth of the Indian economy and employs two-thirds of the population. The agricultural voting base is what likely cost Congress the Punjab election, and served as a key reminder to the party of the fate of its predecessor, the BJP, whose defeat in the 2004 national elections can be traced back to its neglect for Indian farmers. To give an idea of just how dire the farming situation is in India, approximately one farmer commits suicide every eight hours in the western state of Maharashtra alone, leaving their families in endless debt. As Indian farmer activists aptly put it, "If I were given a choice, I would like to be born as a European cow, but certainly not as an Indian farmer, in my next birth." (A cow in Europe earns two U.S. dollars a day on subsidies, while Indian farmers are typically in debt all of their lives.)

In an attempt to curb rising inflation and bring prices down, the government released a "populist" budget Feb. 28 that included further cuts in import duties on essential commodities from 12.5 percent to 10 percent, an expansion of the service tax, an increase in the dividend distribution tax from 12.5 percent to 15 percent and a tax increase for cement, information technology and iron ore companies. The heavier tax burden on business owners will be used to pay for irrigation, education and rural health for India's rural classes. A central focus of this budget concerns the agricultural sector, with an offer of cheaper credit to India's 234 million farmers. Though the budget has the potential to boost Congress' standing among India's rural population, it is unlikely to succeed in bringing prices down and resolving the country's inflation woes.

For India to get a tighter grip on inflation, there is a pressing need for the government to attack the issue from the supply side and expand its productive capacity to cope with rising consumer demand in the country. Factory expansion is greatly inhibited by the country's weak infrastructure and heavy government regulation, and political opposition from the influential leftist parties has hindered many of the government's privatization initiatives. These fundamental constraints show no sign of easing in the near future.

Congress has undoubtedly had a difficult time balancing between its populist and pro-business images, but is about to confront a serious challenge with its decision to allow foreign retailers such as Wal-Mart into the heavily protected retail market. By teaming up with the powerful Mittal family of Bharti Enterprises in India, the world's largest retailer plans to set up several hundred Wal-Mart stores across India to reap the benefits of operating in the world's second-most-populous country. Wal-Mart has won favor among senior Indian politicians with proposals to salvage India's agricultural industry and bring food prices down by providing the storage and investment that small retailers lack to preserve fruits and vegetables for sale (approximately 40 percent of fruits and vegetables rot during in transport from the farm to the store due to inadequate refrigeration). Wal-Mart's foray into the Indian market, however, also carries a number of serious political implications for the Congress party.

India is full of local mom-and-pop stores that will be driven out of business once retail giants like Wal-Mart, France's Carrefour, Germany's Metro and Britain's Tesco get a foothold in the market. Powerful trade and labor unions, with sizable voting banks, have already teamed up with India's vocal left parties to resist any attempts by the government to allow foreign retailers to threaten local traders. Regardless of whether the BJP actually favors attracting foreign investment in the retail sector, the growing opposition to the Wal-Mart-Bharti business deal has provided the opposition party with plenty of political ammunition to battle Congress. Serious reservations within the Congress party about Wal-Mart's entry into the retail market have come to light in recent weeks. Congress party chief Sonia Gandhi basically told the prime minister, in what was likely an intentionally leaked letter, to put the brakes on the project until the government had properly examined the impact transnational supermarkets would have on small stores.

The foot-dragging is only likely to intensify after Congress' defeat in the Punjab and Uttaranchal elections. The remaining state election for 2007 will be held in April in India's most populous state, Uttar Pradesh, in the north. Uttar Pradesh is generally viewed in Indian politics as the benchmark for the national elections, as it sends the largest number of representatives (80 out of the 545 seats) to the federal parliament and has generally provided a good measure of the country's political leanings.

The Congress party has a working relationship with the ruling party of the state, the Samajwadi Party (SP), in which the SP provides outside support to Congress' ruling UPA coalition at the center. But Congress' political partner does not appear to be in good shape for the coming elections -- the SP government has been in hot water as criminal activity in the state has soared and the party's leader has been buried in corruption charges. The BJP is banking on the anti-incumbency factor to help boost its standing in the state at the expense of Congress.

Eighteen percent of Uttar Pradesh's population is Muslim, a voting base that traditionally has favored Congress. Muslims make up a sizable proportion of the local traders that would be affected by the foreign retail entry decision, making it all the more likely that the government will delay the Wal-Mart project. A number of Muslim organizations in Delhi, Hyderabad and Bangalore already have launched anti-Wal-Mart campaigns to protect the Muslim community from this policy decision. The Muslim vote will also factor into India's foreign policy decisions on Iran.

Though the BJP has spent the last year suffering from internal divisions, it evidently has a number of exploitative issues to undermine the Congress party's political standing in the long term. Faced with political, social and economic constraints, Congress has a rough road ahead in the remaining two and a half years of its tenure. Congress' performance in the Uttar Pradesh elections this spring could end up being a deciding factor for the UPA government in the years ahead.

habc said...

Indian Student Charged in Missouri University 'Anthrax,' Bomb Scare

Anoop's Blog said...

I think this was a Chinese experiment to see if their markets were to collapse to see if the world markets will follow or not...looks like it is the case, unfortunately...I expect "Chinese Markets" correct themselves over this summer bringing down world markets with it and push other economies into recession. Chinese don't have much to lose/gain from market as their money, in my opinion, is monopoly money. Ironic thing is Chinese are sitting on more than one trillion dollars reserves, if US market or its currency were to lose value, they will be losers too...So my question is will cut off the branch they are sitting on?