Finance Minister is expected to provide guidelines for the introduction of the direct and indirect tax reforms i.e. the direct tax code (DTC) and the Goods & Services Tax (GST).

FM may increase excise duties to decrease the fiscal stimulus measures and may raise the service tax also from 10%. We expect FM to project a lower fiscal deficit for coming financial year on account of higher revenue projections. Another prime focus would be on reforms to reduce the subsidy burden by decontrolling the petrol and diesel prices and price rise on kerosene and LPG cylinder.

Among the financial sector reforms, issue of raising the FDI cap in private sector insurance companies from 26% to 49% is expected to remain on top. We expect that focus area for expenditure would remain the same i.e. agriculture, water, infrastructure, rural and social schemes and power.

Some major events of the year in India

January 2009

The year 2009 started with a positive wave when Indian Government,?in tandem with RBI, announced the much-awaited Second Stimulus Package, aimed at reversing the?economic slowdown. Also, RBI slashed its main policy rates to protect faltering economic growth amid the global slowdown. Reverse Repo rate cut by 1% to 4.0% and CRR cut by 0.5% to 5.0%. The government eased the foreign borrowing rules for firms, mostly in the infrastructure and real estate sectors, and raised the foreign investment limit in corporate bonds to $15 billion.

On Jan,20, Mr. Barack Obama inaugurated as the 44th President of the U.S., lifting the sentiments that recovery will be faster.

The aftermath of Satyam Scam were dragged in the month of January and Indian key indices lost ~2.5 % on the back of a scam that raised questions over the corporate governance issues & financial credibility of the companies.

February 2009

India came up with December month IIP data (-2%) and Q4′09 GDP numbers (5.3%), which were far below the expectations. India saw a big jump in local car sales by 34% on Y-o-Y basis.

The global recessionary trends emerged large over the market sentiments with Sensex shedding 5.7% & Nifty losing 3.87% in February.

President Obama signed the $787 billion economic stimulus package into law, which included a variety of spending measures and tax cuts, intended to promote economic recovery. US also came with its decreasing fourth quarter GDP at an annual rate of 6.2 percent.

March 2009

Indian govt. again cut the Repo (from 5.5% to 5%) and Reverse Repo (4% to 3.5%) rate to increase the liquidity into the system. The global recessionary trends took a breather amidst a slew of Revival Packages from all major economies across the globe. So did the Indian markets and they ended the March month on a positive note gaining 9%.

April 2009

India Inc. reported its quarterly & yearly results, which were better than expected. The month saw strong FII inflows.

But on the later half of the month, Swine Flu declared, apart from it, US?s first quarter GDP also decreased at annual rate of 6.1 percent. Then, in US, the automobile manufacture Chrysler LLC filed for bankruptcy.

The March month?s positive vibes influenced the April month also and Indian markets gained 17% during the April month.

May 2009

The biggest news in May was the Return of UPA government to powerin the 15th Indian general election. The victory was followed by first ever double upper circuit on the markets in the history, with key indices gaining 28% in the month of May. The FII recorded a net inflow of Rs. 13,886 crs in the month. But in this monh, India also confirmed first cases of (A) H1N1 influenza.

June 2009

June came with some bad bunch of news around the world. In India, Indian weather department declared delay in monsoon and stock markets saw FII outflows. On the whole, the market closed on a negative note. In US, General Motors filed for bankruptcy, then the first quarter GDP decreased at annual rate of 5.5 percent.

July 2009

July month saw a good quarterly earning numbers and huge overseas inflows. GoI also announced the financial sector reforms and stake sale in PSUs in order to raise funds.

On the US front, the economic news was mixed but mostly positive. Despite a drop in consumer confidence, better than expected GDP numbers, boost in new home sales and home prices, and rise in the Chicago PMI report all pointed to stabilisation in the economy.

August 2009

The month of August saw a mixed action on the India front. Government drafted a new direct tax code on hopes of higher disposable income in hand of individuals. There were concerns about rainfall deficit & drought being declared across various villages of the country.

On the economic front, the India`s GDP grew to 6.1% in Q1 June 2009, that was lower than 7.8% achieved in Q1 June 2008 but it was better than the 5.8% expansion witnessed in Q4 2009.

There was a sharp surge in food prices in the August due to scanty rains that might stoke inflationary pressures in the economy. But the revival in the monsoon rains cheered the prospects for rice and sugar cane. The weak monsoon led cut in kharif crop production by 18%.

Further, the planning commission projected the GDP growth rate of 6.3% for the current fiscal year and a growth rate of 8% in the coming fiscal before the economy returns to 9% growth in 2011-12.

BSE also launched its IPO index, (which will track companies with a free-float market capitalization of at least 1 billion rupees on listing day.)

On the whole, the Indian markets closed on a flat note.

In US, second quarter GDP fell 1 %, unchanged from the advance estimate in July and following a 6.4% drop in Q1.

September 2009

The ringing of the festival season brought improvement in sales in consumer driven segments. Another positive was that India’s exports fell by annual 19.4 per cent in August Vs 28.4 per cent in July as demand for merchandise picked up in the big global markets ahead of Christmas.

Interest rate futures was reintroduced, which was a significant step towards developing the debt market in India.

October 2009

India recorded a positive set of IIP numbers to 10.4%, which were above the expectations.

The traditional pre-Christmas sell-offs by FIIs had advanced by a couple of months this year. India Inc also saw poor corporate results from some of the giants. The markets shed over 7%.

In US, the third quarter GDP increased at an annual rate of 3.5 percent. The Dow closed above 10,000 for the first time in a year.

November 2009

The IIP numbers, India’s industrial output, grew 9.1% in September from a year earlier, helped by fiscal stimulus and festival demand adding to the debate on the timing of exit policy.

Next in line was a slightly cautious number for that of the wholesale price based inflation data which would now be announced on monthly basis instead of every week. The wholesale price index was up 1.34% in October from a year earlier, compared with 0.5% in September and 11.06% a year ago.

Another interesting and a positive number was India’s strong GDP data that cheered the investor sentiment that the economic recovery is gaining momentum. India’s economy grew at a spectacular 7.9% in the July-September period, up from 6.1 % in the previous quarter, bolstered by government stimulus measures and rising industrial production. The growth compares favorably to 7.7 % recorded in the July-September quarter in the previous year.

NSE launched a platform for trading mutual fund units, called Mutual Fund Service System on?Nov. 30?for trading mutual fund units, with an aim to widen the reach of mutual fund schemes to smaller cities and towns and cut operational costs.

Internationally, crude oil made its 1 year high at $82 and CIT group filed for bankruptcy in US.

Overall, Indian markets gained 7% in this month.

December 2009

Gold made its life time high at $1,226, other commodities like sugar also made its high in the Indian markets at ~$8.5.

India witnessed the IIP numbers at 10.3%, which were below the expectations of 12%.

Till now, from Jan 2009 to till now, Indian key indices have seen an increase of 72% in its value.

The news of $80billion Dubai debt default came. The market expected it a second wave of recession.?After Dubai, S&P and Fitch downgraded Greece’s credit rating. Then, S&P revised?Spain’s outlook to negative.

Meanwhile, the year 2009 saw a significant slowdown in India’s official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP, which would be among the highest in the world. India witnessed a weak monsoon this year, affecting the agriculture sector.

Some major events of the year in India

Jan 2: Indian Government in tandem with the Reserve Bank of India (RBI) announces the much-awaited second Stimulus Package aimed at reversing the economic slowdown.

May 18: Congress won the 15th Indian general election and Sensex gained 2,111 points from the previous close of 12173, a record one-day gain. In the opening trade itself the Sensex evinced a 15% gain over the previous close which led to a two-hour suspension in trading. After trading resumed, the Sensex surged again, leading to a full day suspension of trading.

May 19: Manmohan Singh re-elected as Prime Minister of India.

May 19: India confirms first cases of (A)H1N1 influenza.

Dec 1: Till November this year, FIIs have put in investments worth Rs.76,182 crore into the Indian stock markets. The top investor is USA which has got equity investments to the tune of Rs.21,345 crore, followed by Luxembourg, France, Mauritius, UK.

Around the world

January 20: Barack Obama inaugurated as the 44th President of the U.S.

February 3: S&P lowered California’s bond rating to A from A+.

February 17: President Obama signed the $787 billion economic stimulus package into law. The “American Recovery and Reinvestment Act of 2009″ includes a variety of spending measures and tax cuts intended to promote economic recovery.

February 27: Fourth quarter GDP decreased at an annual rate of 6.2 percent.

March 2: Dow Jones Industrial Average drops below 7000 for the first time since 1997.

March 19: Moody’s lowered California’s bond rating from A1 to A2.
Fitch lowered California’s bond rating from A+ to A.

March 23: U.S. Treasury Secretary unveils the Public-Private Investment Program.

April 26: Swine Flu declared public health emergency.

April 29: First quarter GDP decreased at annual rate of 6.1 percent.

April 30: Chrysler files for bankruptcy.

June 1: General Motors files for bankruptcy.

June 10: Fiat completes acquisition of Chrysler assets.

June 25: First quarter GDP decreased at annual rate of 5.5 percent.

July 6: Fitch Ratings downgraded California?s long-term bond rating from A- to BBB. Moody’s lowered the State’s rating from A2 to Baa1.

July 24: Dow closes above 9000; first time since January. Federal minimum wage jumps from $6.55 an hour to $7.25 an hour.

July 28: Case-Shiller index shows first rise in U.S. housing prices in 3 years.

August 27: Second quarter GDP fell 1 percent, unchanged from the advance estimate in July and following a 6.4% drop in Q1.

October 14: Dow closes above 10,000 for the first time in a year.

October 29: Third quarter GDP increased at an annual rate of 3.5 percent.

The impact on Indian stock market was as follows…

January 2009

After a positive month of December, the month of January ended on a negative note with Satyam scam being the party spoiler. During the month, Sensex lost 2.31% & Nifty lost 2.84% on the back of a scam that raised questions over the corporate governance issues & financial credibility of the companies. Midcaps & Small caps were the major losers of the month losing 9.07% & 9.34% respectively.

February 2009

The markets continued its downward slide for the month of February taking cue from the Global markets with Dow jones touching its 2004 level lows. The global recessionary trends loomed large over the market sentiments with Sensex shedding 5.65% & Nifty losing 3.87% for the month. Midcaps & Small caps were again the underperformers for the month losing 6.23% & 6.98% respectively.

March 2009

The markets bounced back from the lows of February taking cue from the Global markets with most global markets ending the month in green. The global recessionary trends, which loomed large over the market sentiments over the previous few months took a breather amidst a slew of Revival Packages from all major economies across the globe. Sensex ended the month on a positive note gaining 9.19% & Nifty gained 9.31%. Midcaps & Small caps however underperformed the markets gaining just 7.18% & 4.53% respectively.

April 2009

The markets showed immense strength on the back of more than 9% growth in March ending on a positive note gaining as much as 17.46% on Sensex & 15% on Nifty during the April month. The rally was driven by strong FII inflows in the month of April coupled with quarterly & yearly results which were better than expected. Firm Global markets were amongst the other driving factors behind the huge rally which also saw Midcaps gaining 18.86% & Small caps gaining 21.38% both outperforming the benchmark indices.

May 2009

The Return of UPA government to power with a clear mandate by the people of India led the markets to a historical rally in the month of May. The victory was followed by first ever double upper circuit on the markets in the history. Sensex gained 28.26% & Nifty gained 28.07% in the month of May, continuing its three months rally. The rally was marked by strong FII inflows in the month of May with Net inflows of Rs. 13,886 crs. Midcaps were the flavor of the rally, gaining 43.91% & small cap gaining 51.92%, both outperforming the benchmark indices.

June 2009

Indian equities registered a fall with strong volatility during June 2009. The market commenced the month on a positive note helped by huge FII inflows and strong global cues. The rally in the market was continued till mid of the month. During that period, the BSE Sensex touched 10-month high of 15,467 on expectations that the government will increase public spending in the budget to spur economic growth. The markets then saw profit booking at higher levels. It witnessed continuous drop towards the end of the month on concern over delay in monsoon and FII outflows. However, recovery was seen in the final few sessions on the hope that the government will make policy announcements in the budget. On the whole, the market closed on a negative note.

July 2009

July 2009 turned out to be favorable for Indian stock markets. The Indian markets rallied on the back of good quarterly earnings, huge overseas inflows, positive global developments and announcements by the Government, regarding financial sector reforms and stake sale in PSUs in order to raise funds.

On the US front, the economic news was mixed but mostly positive. Despite a drop in consumer confidence, better than expected GDP numbers, boost in new home sales and home prices, and rise in the Chicago PMI report all pointed to stabilisation in the economy.

August 2009

The month of August saw a mixed action on the India front. Better-than-expected economic data and the draft new direct tax code on hopes of higher disposable income in hand of individuals triggered recovery in the markets. It was unable to sustain level towards the end of the month on weaker Chinese markets. On the whole, the market closed on a flat note amidst concerns about rainfall deficit & drought being declared across various villages of the country. So, the capital markets witnessed a lot of volatility taking cues from the global markets. On the economic front, the India`s Gross Domestic Production (GDP) grew to 6.1% in Q1 June 2009, that was lower than 7.8% achieved in Q1 June 2008 but it was better than the 5.8% expansion witnessed in Q4 2009. There was a sharp surge in food prices in the August due to scanty rains that might stoke inflationary pressures in the economy. But the revival in the monsoon rains cheered the prospects for rice and sugar cane. Further, the planning commission projected the GDP growth rate of 6.3% for the current fiscal year and a growth rate of 8% in the coming fiscal before the economy returns to 9% growth in 2011-12.

September 2009

The month of September ended with BSE’S bellwether index, Sensex, breaching the 17000 mark buoyed by the powerful tide of liquidity. The main drivers were the improved data across global economies & festival season ringing in improved sales in consumer driven segments. Another positive was that India’s exports fell by annual 19.4 per cent in August Vs 28.4 per cent in July as demand for merchandise picked up in the big global markets ahead of Christmas.

October 2009

Between Diwali of 2008 and the one just gone by, Indian stocks moved only in an upward direction with BSE Sensex posting a 74% growth. However, the week after Diwali, saw a stunning turnaround. The month of October saw the Sensex shed over 7%, the worst one-month fall in the year. Poor corporate results by some of the industry giants could be blamed for the fall in the market. The FIIs also played their part with foreign funds being infused to the tune of $14.4 billion (over Rs 67,000 crore) in Indian equities till October this year. But, under intense pressure to realise profits, the traditional pre-Christmas sell-offs by FIIs has advanced by a couple of months this year with ruinous effect on stock prices.

November 2009

The Markets bounced back from the lows of October and ended the month of November on a positive note, amidst heavy buying by both the FIIs and DIIs. Sensex ended Positive gaining 6.48% and Nifty gaining 6.81. November was a month with a mixed bag of news. The IIP numbers, India’s industrial output, grew 9.1 percent in September from a year earlier, helped by fiscal stimulus and festival demand adding to the debate on the timing of exit policy. Next in line was a slightly cautious number for that of the wholesale price based inflation data which would now be announced on monthly basis instead of every week. The wholesale price index was up 1.34% in October from a year earlier, compared with 0.5% in September and 11.06% a year ago. Another interesting and a positive number was India’s strong GDP data that cheered the investor sentiment that the economic recovery is gaining momentum. India’s economy grew at a spectacular 7.9% in the July-September period, the fastest pace in six quarters, bolstered by government stimulus measures and rising industrial production.

The markets also gave this number a cold shoulder and ignored it completely. But it surely got the economists excited, as this was a first. Negative inflation which is also referred to as deflation is the biggest indicator of recession in the economy. But here, in Indisa, it was touted by all as a “historic statistical curio”, that’s all it was. A statistical aberration.

So does this mean that the Indian economy is in recession? Definitely not! For a economy to be officially declared as being in recession, it has to show a negative real economic growth or falling GDP consistently for at least two quarters. Deflation in economic parlance means fall in price level of goods and services, resulting in an increase in the real value of money.

Deflation occurs where there is a fall in demand and prices are also down. In deflationary economy, people typically delay their buying until prices fall further  which in turn reduces overall economic activity, leading to huge idle capacities thus contributing to the deflationary spiral.

Deflation is usually counteracted with a cut in interest rates, increasing supply of money and announcing economic stimulus. Now this is something which we see in USA – the stimulus, the bailout leading to increased money supply and interest rates are at their lowest levels.

In India, there was a time when people delayed their buying’s but this was seen only in realty sector but not all around. It’s not like people have been putting off buying cars because they expect prices to come down further. One has to just go the shopping malls on any given weekend to see if people have stopped buying. And rate cuts? There is no way that RBI is going to initiate any rate cut now based on this negative inflation as it is simply not needed.

Then there is the question of increase in the real value of money. Apart from the rupee rising vis-à-vis the US dollar, there is no real rise in the value of money. We were paying Rs.20/kg for banana, supposedly the fruit of the poor six months ago and even today, the rate is the same if not higher. Price of commodities is up, pulses and grains, vegetables and fruits costs’ more. So where is the price going down to say we are into deflation?

Yes, we did have economic stimulus and lowering of interest rates but that was at a time when the entire world was reeling under recession and we had huge piles of inventories. At that time, if someone had said that we had deflation it was more believable. But today, when the April IIP numbers have come in the positive and some sectors are showing sure signs of revival, how can we say this -1.61% is deflation?

So then why do we have a negative inflation? The biggest reason is the base effect. Due to higher prices last year as measured by the WPI, we thus have a negative inflation. It is more of a statistical fall and does not indicate any systemic deficiency. Consumer price index is over 9% and India’s GDP is growing at the rate of 6%.

The struggling-to-survive man on the street, the woman haggling with the vendors to save a few pennies more and the elderly having to do away with healthy fruits simply because they are unaffordable all point in one direction – prices need to come down. On one had we have deflation and then life becoming tough due to mounting costs on the other. This means, we need to urgently change the way we calculate our inflation rates as it seems to have no connection whatsoever with the ground reality.

Inflation rates have become a joke and unless it is linked with the CPI, it makes a mockery of the entire system. Maybe that is why the markets pay no attention to it any more?

In a few days, India will have a new Prime Minister. It’s as good a time as any to take stock of the men — and one woman — who have served us. Who’s been the best PM India’s had, and who’s done the most damage?

Before I begin my analysis, I’d like to emphasise that these are purely my views, and do not reflect the opinion of The Times of India as an organization in any way. I’ve tried to be neutral and objective, and mentioned both the faults and positives of all the PMs. But I’m sure many people will vehemently disagree with my opinion, which of course is their democratic right. So, let the debate begin!

Jawaharlal Nehru: India suffered heavily because of his misplaced sense of idealism over Kashmir, resulting in a problem that troubles us to this day, and his naivete over China. But the fact is that much that is good about India today, including world-class institutes of higher learning, our space programme and the widespread use of English that gives India a competitive advantage in a globalised world, are the result of his vision. Unlike many other colonised countries that got freedom at the same time as India and promptly become tinpot dictatorships, India is still a vibrant democracy – and that is surely Nehru’s biggest achievement. It has been rightly observed that if Nehru had been a different kind of man, India would have been a different kind of country. For helping make it a rare success story in South Asia, I think he deserves the title of our best PM ever.

 
Indira Gandhi: A poll conducted by a leading Indian magazine some years ago rated her as India’s all-time best Prime Minister. I’m afraid I don’t share that opinion. The Emergency was arguably the worst assault ever on Indian democracy. Much of the ills that plague our politics, including corruption, criminalisation and the degradation of institutions like the Presidency, first flourished in her tenure. She effectively killed inner-party democracy in the Congress, and set the stage for the kind of cliques that are today the bane of Indian political parties. And she encouraged cynical misuse of religion — the rise of Bhindranwale was originally encouraged by the Congress in a bid to embarrass the Akali Dal.On the positive side, though, she did lead India to one of its finest hours — victory in the 1971 war. She was also in charge when India conducted the Pokhran tests. And she held India together during a deeply turbulent time.

 
Rajiv Gandhi: The 1984 Sikh riots and the Bofors scam will always remain blots on his record. So will his clumsy efforts to woo Muslim fundamentalists through the Shah Bano case while courting the Hindu right wing through his decision to open the locked Ayodhya gates. But he has been proved right on many things, which were scoffed at during his lifetime, including his belief in computers and economic liberalisation. Rajiv was the first to talk of taking India into the 21st century, and he did a fair bit to help us get there. His contribution in triggering the country’s IT and communications revolution has not got the credit it deserved. Nor have his other worthy initiatives, like panchayati raj. His tragically early death left many wondering what might have been.

 
Narasimha Rao: Slumbered through the demolition of the Babri mosque and was plagued with charges of graft and buying support in Parliament. But played an important role as the godfather of India’s much-needed economic reforms. Had the sense to induct Manmohan Singh as finance minister and back him to a large extent. Is also significant as the first non-Gandhi to complete a five-year term.

 
A B Vajpayee: The first non-Congress PM to complete at least one full tenure, which marked an important landmark in Indian politics. His failure to do anything as Gujarat burned is a negative mark against him. Also, even though the BJP flaunts its anti-terror credentials, the fact remains that Vajpayee presided over one of the most humiliating moments in Indian history: the escorting of three terrorists to Kandahar by Jaswant Singh in exchange for hostages.But Vajpayee’s tenure also saw India turn an initial setback into a proud victory at Kargil. He finally took India openly nuclear. And despite gloomy predictions to the contrary, the economy didn’t collapse under the weight of the sanctions that followed. Ultimately, the US came around to India’s N-programme and the economy boomed during Vajpayee’s last years. The irony is, the BJP’s proud claim of India Shining boomeranged on it in the 2004 elections.

 
Manmohan Singh: His critics deride him as India’s weakest PM ever. But the way he pushed through the N-deal with the US in the face of overwhelming political opposition would seem to belie that charge. The economy didn’t do as spectacularly under him as his past record as finance minister had led one to hope. But it stayed on an even keel till it hit the speedbreaker of the global recession. His biggest failure, perhaps, was that his government seemed to be a mute spectator as India reeled under a string of terror serial blasts, and it finally took a 26/11 to shake it out of its stupor.

As you might have noticed, I’ve only looked at the PMs who completed at least one, or more, full terms in office. The others hardly did anything of significance, though Chandrashekhar’s decision to mortgage India’s gold was a much-needed wake-up call that we could no longer continue with our misguided economic policies. However, there was one man among this bunch who, I believe, did the most damage to India.

 
V P Singh wrecked efforts made over decades to turn caste into an irrelevant relic of medieval times, and brought it to the front and centre of Indian politics. Call me naive, but I made it all the way to college without ever knowing — or caring — what my caste was. It was enough for me to be an Indian. I’d like to believe it was the same way for many other young Indians. Idealistically, we believed that caste was an evil that had been made redundant in major Indian cities, and would one day be banished from small towns and villages too. VP’s cynical use of the Mandal Report to try and counter the rise of the BJP shattered that hope forever. Worse, it led to the rise of many small parties based on identity politics, which have no vision for India beyond their narrow vested interests. Today, sub-castes actually agitate to be declared backward. India has, thankfully, managed to avoid full-blown caste conflict but that’s no thanks to VP. Rarely could a person who spent so little time in office have done so much damage to a country.

 
P.S: Before I’m accused of being casteist, I’d like to clarify my stand. I believe that one of the foremost duties of government — Centre and states alike — is to ensure affordable (if not free), high-quality education to all citizens, regardless of caste or community. Thereafter, there should be free and fair competition for jobs, based on equality of opportunity. Having failed to achieve this basic goal, politicians have resorted to lazy, and ultimately deeply divisive tactics like reservations. It’s a shame we haven’t managed to see through their ploys.

Fuels and metals prices being far lower than last year, along with low demand in the economy gave this higher base year effect. Now, there are talks of Deflation. Market men are expecting the inflation will head towards zero level in 3-4 weeks and soon in negative territory for 4 to 5 months, which will open the way for the Reserve Bank of India to cut interest rates further to grow up demand and economic growth.

First of all, we need to know what exactly deflation is. In Inflation, money becomes relatively less valuable than goods. And deflation being the exact opposite of inflation, money becomes more valuable than the other goods in the economy. And when does deflation occur? It usually occurs when supply of goods is more than supply of money. So demand for money goes up and demand for goods goes down. Does this mean that we are now talking of a fall in inflation caused by falling demand? Well, if we see the IIP numbers of Dec/Jan, especially the falling growth rate of the manufacturing sector, it conveys the same. So, in the coming few months, market is expecting negative Inflation.

With inflation at its historic low, the consensus in the market are like in terms of policy response, RBI will ease the liquidity by cutting both the REPO and reverse REPO rates by 100 basis points by mid-2009. But RBI has already taken so many measures in the past few months, now the onus is on the banks. Rather than concentrating on what the central bank is doing, we have to really see is what the cost of funds is for the banks, and that requires lower deposit rates. The banks have reduced the interest rates on bulk deposits, which is at an average of 10% while it has not really reduced the lending rates, which continues to remain at an average of 12%, which is the PLR. Banks have become risk averse to the extent of being over cautious. Unless the banks are not able to redeem the high interest cost deposits, the rates are not expected to come down. One could see rates coming down in the slack season between April-September 2009. Once RBI reduces the rates, then deposit rates could come down further and it is only after that, that the banks will reduce lending rates. Then only we can see some industrial demand.

We cannot say that we will actually see Deflation very soon, because to some extent, the current condition is just an eyewash. The gap between WPI and CPI is further widening. WPI Inflation as measured by RBI is 0.44 %, but the Retail inflation as measured by the consumer price index has moved up to 10.45% in January, the highest since December 1998.

Now the question arises, why prices at the retail level are not coming down – in spite of the WPI based inflation coming to 0.44 %.

Well, when inflation goes down, the process starts from the supplier of raw materials like in case of housing industry, the process starts from the iron-ore–>Steel industry –>Trader–>Construction industry –> Home owner. So just imagine the effective time which inflation takes to reach to the ultimate real consumer. The iron ore just mined out may take around 1-2 years to reach our home, which is under construction. By that time, inflation goes up again, the trader, who purchased steel cheap, raises his prices to match the current prices and the steel becomes costly again so we don’t find the difference in our daily-lives.

So, the recessionary trends will not go away and demand will not pick up until things change at the retail level because ultimate buyer of everything is common man only. In addition to this, sentiments should improve.

The asset price bubble, which was basically built from the abnormal increase in the prices of real estate, heavy FII money in the equity markets etc. in the past, had made India as a “high cost economy”. So, the deflation at -5 to -10 % is required to restore competitiveness of the Indian economy. This rolls the current price levels to few years back and restores sanity in the market place.

But if deflation sustains for longer period of time, it will result in less demand, lower production and weak economic growth.

So, in this scenario, investors should invest in those companies where decline in prices lead to increase demand for their products, prompting them to produce more value-added products with greater economies of scale. Companies, operating in sectors like snacks and beverages, health care, utilities and telecommunications can be a good buy. Apart from this, companies with strong balance sheets, which do not have much debt on their books, can also be considered for investment like IT, health care and energy sectors.

Though negative inflation is not good from a growth point of view but India’s low inflation rate for 5-6 months will not be a cause of worry as it will enable policy makers to take more steps to stimulate a slowing economy and if some more monetary easing is done, economy can see some revival in demand due to decrease in lending rates.

Corporate frauds have exploded in India and have become a phenomenon. From Harshad Mehta to Ketan Parekh, to Madhavapura Co-operatives in 2002 to the CRB scam involving Roop Bhansal and further down to the initial public offering scam — popularly known as the Rupalben scam in late 2005 to the latest one Satyam’s fraud, it is a familiar story of a few corporate heads indulging in creative accounting with the sole object of enriching themselves at the cost of the lower middle-class investors.

Frauds are not new for the corporate world. This is because by it very definition, even bribery or supplier kickbacks comprise fraud. Other type of frauds includes accounting frauds (includes financial misconduct by top management), theft of intellectual property, data or information, counterfeiting etc. What is unfortunate is the fact that not many organizations seem to have a complete understanding of frauds that botch their balance sheets and cause financial injury even as they stand helpless in the wake of poor mechanisms to plug loopholes.

According to estimates, India is losing a whopping $40 bn per year because of corporate frauds, which is more than 4% of the country’s gross domestic product.

There is a crisis of confidence arising from the failure of the pillars of the capitalist system such as the stock market, financial analyst and accountants and the investment banks. It is unbelievable that the hundreds and thousands of “whistle-blowers” from board directors to corporate insiders and the accounting firms and the credit-rating agencies were kept in the dark about the goings-on in the Indian financial world.

LIST OF FRAUDS IN INDIA

The Flying Companies: In the last decade of nineteenth century IPO was the buzzword of the stock markets. Investors were lured due to the hefty returns on the listings. It was the IPO boom. There were however no stringent norms for the companies to come out with an IPO. The flying company scam or the IPO bubble in the mid nineties exposed the half baked nature of reforms of Indian Economy.

Plantation boom in 1990’s: Somebody promise that growing plants is the shortest way to create the wealth. Investors are taken for the ride in Plantation Fraud.

Market manipulations: Twice in the history of the stock markets in India single person succeeded in manipulating the share prices on large scale. Ketan Parekh and Harshad Mehta get the dubious distinction of being the Stock Market Fraudsters.

CRB Capital Markets (1996): Chairman Chain Roop Bhansali was accused of using CRB’s accounts in SBI to siphon off Rs 1,200 crore bank funds, claiming the firm was encashing interest warrants and refund warrants. He used very innovative products to attract the depositors to his non-banking finance company.

ITC-Chitalia’s Fera Violation (1996): It was an $ 80 million fraud into exports transactions between ITC and EST Fibres of the Chitalia group during 1990- 1995 revealed Fera violations.

Western Paques:Nandan Gadgil who gave his investor the dream of making his company bigger than HDFC suddenly disappeared from the Indian Bourses. All his companies defaulted to a great extent.

Home Trade (2002): A Rs 6,000 crore fraud when eight co-operative banks, including Valsad People’s Co-operative Bank and Navsari Co-operative Bank among others collectively lost over Rs 80 crore.

SSI Technologies Inc: An arm of SSI Technologies Ltd, which figured in the K-10 stocks of broker Ketan Parekh, who led the 2002 market collapse and was arrested later for alleged share price manipulation. Kalpathi Suresh, the chief executive of SSI, eventually sold the software services and software education businesses to PVP group.

DSQ Software (2003): Dinesh Dalmia’s DSQ Software was accused of dubious acquisitions and biased allotments made in 2000 and 2001. It was an Rs 595 crore fraud. In March 2006, Indian authorities arrested Dinesh Dalmia, chief executive of DSQ Software, for fraud and inducing US investors to part with $100 million for investment in substandard equipment for operating a back-office firm out of India.

Along with DSQ Software Ltd, companies like Pentasoft Technologies Ltd and Pentamedia Graphics Ltd also recorded scandals over insider trading and other corporate malpractices and collapsed after their promoters in 1999 diversified from the software and animation services business into new ventures such as resorts and multiplexes.

Rising instances of corporate fraud have set the alarm bells ringing within India Inc. Below is the fact file of Fraud Survey Report 2008, conducted by KPMG: · 70 percent companies believe fraud will increase over the next 2 years.

· 75 percent respondents identified fraud as a matter of highest concern.
· 80 percent said fraud poses a big problem.
· 60 percent acknowledged fraud occuring in their own companies.
· 11 percent lost between Rs. 1 to 100 millions due to fraud.
· 5 percent companies lost more than Rs. 100 millions due to fraud.
· 53 percent reported loss less than Rs. 1 million.
· Unethical behavior of employees and inadequate anti-fraud measure main worrying factors.
· 60 percent respondents do not have adequate knowledge of anti-corruption law.
· Financial sector hit worst – followed by real estate & infrastructure – pushing IT & ITeS to third place.

Profile of a fraudster
People who have longstanding relationships with the victim company perpetrate a majority of frauds.

How companies treat fraudsters
More than a third of Indian companies do nothing about frauds.

The most vulnerable sectors
The Indian financial servcies, real estate and IT/ITES sectors are most susceptible to frauds.

SAYTAM’S FARUD

The purpose of the scam

The purpose was aimed to make the company more attractive for investors. Raju pointed out that given the low promoter holding in the company (8.6% as of September 2008), poor performance could result in a take-over. It was important, therefore, to make it seem as if both the top and bottom lines were growing at a healthy rate, even if that was not actually true.

How did the bubble build?

The problem with overstating performance is that if you want to keep growth rate looking good, the absolute extent of the exaggeration has to keep getting bigger. To take this particular example, in 2003-04 Satyam reported net sales of Rs 2,542 crore. In the four years since then, that figure was reported to have grown by 36%, 34%, 40% and 31% respectively to reach Rs 8,473 crore in 2007-08.

Now, if an Rs 2,500-crore company wants to show 35% growth when it has actually grown by only say 25%, the extent of overstatement would be only Rs 250 crore (10% of Rs 2,500 crore).

But if an Rs 8,500-crore company wants to do the same thing, it will have to fudge the figures by Rs 850 crore. It is also important to realise that overstating revenues by 10% can overstate profit by a lot more.

For instance, if actual revenues were Rs 2,000 crore and actual net profits Rs 200 crore, an addition of Rs 500 crore to revenues without changing anything else would also add Rs 500 crore to net profit. While this would mean exaggerating revenues by only 25%, the profit figure would get overstated by 250% (500 cr is two-and-a-half times 200 crore).

Aftermath

The incident has resulted in immeasurable and unjustifiable damage to Brand India and Brand IT in particular. No doubt, India Inc has reacted with shock and dismay to the scam and it is likely to dent the public credibility about the concepts of corporate governance that the Indian industry has been so persistently trying to cultivate for the last decade.

An accounting fraud was the last thing investors in India would have imagined as a trigger for a reversal in investor sentiment. The Satyam accounting fiasco has come at a time when the sentiment is already brittle and is likely to affect the image of Indian companies among foreign portfolio investors.

Impact on Satyam as a company

1. Satyam stock is being removed from its S&P CNX Nifty 50-share index from Jan 12 and the Bombay Stock Exchange is expected to follow suit. Satyam will also be excluded from the CNX 100 index, CNX 500 index and the CNX IT index. Reliance Capital Ltd will replace Satyam in the main index. Satyam has lost more than 10000 Crore rupee in a single day trading (on Thrusday).

2. Satyam’s American Depository Receipts is halted for the time being (suspended) and replaced it by Axis Bank.

3. Satyam’s largest shareholder, Aberdeen AMC, dumped the tainted software entity’s shares on Wednesday, was also a seller in other index stocks like Reliance Communications and JP Associates.

4. Several domestic and foreign brokerage firms, including Credit Suisse, Religare and Angel Broking, suspended their coverage of Satyam shares.

5. The selling after Raju’s 7 pages letter to the board:
(a) Swiss Finance Corp Mauritius Ltd: Sold 7786759 shares at Rs.74.61
(b) Aberdeen International India Opportunities Mauritius Ltd:Sold 9830811 shares of the company at Rs.43.41
(c) Aberdeen Asset Managers Ltd Aberdeen Global Asia Pacific fund: Sold 4179064 shares at Rs.43.41

Impact on Investor

Normally the common man did not really look at balance sheets and only went by media reports, stock market performance and word of mouth to make his investment decisions. Now, he will be careful.

Impact on FII’s

The fraud at Satyam, wherein the books were cooked to show inflated topline and bottomline, will most definitely make foreign institutional investors (FIIs), the biggest believers in the Indian IT story, look at this counter closely.

FIIs had walked the talk and are currently large shareholders of most publicly traded Indian IT companies. In Satyam Computer, the FII holding is about 47%. At Infosys Technologies, it is 41%. At Wipro they hold a third (7%) of the non-promoter stake. At HCL Technologies, of the 33% held by non-promoters, FII holding is 18%. At TCS, their stake is 11% (promoters own 76%). All figures are for September 30,2008.

FIIs will be cautious about investing in the IT services counter. Naturally there will be higher level of due diligence.

Foreign investor confidence is basically dependent on how the regulators act. In Satyam’s case, uniquely two regulators are involved, SEC in the US and SEBI in India, as Satyam is also listed in the US. A lot depends on how they behave. How our government behaves. Business will take cues from that.

Satyam’s fraud disclosure, the industry believes, has come at a bad time, when recession is likely to hurt the earnings of the IT industry.

Impact on employees

Co. will not pay 2 months salary to the 53,000 employees and strong chances to lay-off of people are there who were sitting on the bench or were close to completing their assigned projects.

For a company, which is indulged in service sector, employees contribute to almost 52% of the co. expense, so lay off is the strong tool to cut the cost.

The other Big IT giants like Infosys has refused to hire any Sataymite.

The India Inc. image

The whole of the Indian industry should not be tarred with the same brush as most of the companies uphold the highest standards of corporate governance and this will help in mitigating the damage done to India’s image.

However, the revival of India’s position as a preferred investment destination would depend on the speed of regulatory action to salvage the situation. The regulators would have to take drastic measures to regain the confidence of foreign investors in Indian companies as frauds like these will have greater implications on emerging markets than developed markets.

Now, All Indian companies listed in the US have to go through a lot of procedures and filings, which talks about risk factors and financial position of the company.

FIIs will be difficult to convince and it will take time before FIIs line up in India and India loss will be the gain of China.

The need of the hour

Tighter rules for accounting and corporate governance, including appointment of independent directors by selection committees, and greater oversight from regulatory and government authorities.

Noble Group also suggests separation of audit and consultancy functions at companies, and quicker publication of annual reports.

India’s Volatility Index

H1B visa’s (which allows U.S. employers to employ foreign guest workers in specialty occupations) and Outsourcing which Obama talked about earlier, are too micro issues and do not make sense in the whole macro picture.

Positives

· Obama’s comments on outsourcing would not affect Indo-US economic ties. There should be no worries in Indian BPO firms, as long as the US government has a pro-business attitude. Outsourcing was not done to benefit India. It was done to improve the corporate bottomline so the shareholders can be happy. The US government’s role was extremely limited in businesses and hence it would not affect the US business here, it seems experts and Indian business leaders are optimistic about Obama’s win and its impact on Indo-US economic and political relations.

· Companies like IBM, EDS and Accenture have sent and are continuing to send thousands of jobs over to India, not to improve shareholder wealth, but to stay in business. When large business customers on Wall Street and elsewhere choose Indian companies like Infosys, Wipro and TCS as their IT providers over US-based providers, the US IT providers have little choice but to ship jobs overseas to cut costs and remain competitive.

· Outsourcing has gone beyond political debate. Of course, there’ll be an adverse impact on Indian economy if outsourcing is stopped. But Obama is required to create jobs within the US, which can’t be done in a few months. This will take 2/3 years for the new president to sort out. Moreover, outsourcing is a business reality, which will always be there. And for geo-political reasons, Indo-US relations will be stronger. Like China, India has a vast consumer base, which the US companies cannot afford to neglect. Earlier, MTV, Turner and other entertainment biggies independently set up their businesses in India. But the times have changed. Now, Disney is in collaboration with Yashraj Films; Spielberg is in financing deal with Reliance. Indian companies are having global dreams.

· The slowdown in the US had encouraged small and medium enterprises there to look at India for expanding their business plans in a high growth market economy with a low-cost manufacturing base.

· Increased presence of the Democrats in both US Houses is likely to benefit the Indian pharma industry through new legislations favoring. Obama has laid out a vision for reforming the US healthcare system in a way that protects the quality of care while making it affordable and accessible to all. This will encourage increased use of generics in government-funded programmes and should boost Indian generic drugs, which accounts for one fifth of the global production. It has more than 100 USFDA approved plants. However, pricing will continue to be under pressure due to recent financial bailouts.

· Mr Obama’s win will also allow for the reimportation of drugs, with a caution that prices of the reimported drugs should be lower than their cost in the US. Allowing reimportation would provide Indian manufacturers with greatly expanded access to the profitable US market.

· The new US government will be clearly more pro-generic. That will lead use of low-cost generic drugs, so to that extent, more Indian companies will gain.

· Although biogenerics are already being manufactured in Europe and India, there is no pathway for regulatory approval in the US, stalling their introduction into the lucrative US market. This will be beneficial to those Indian companies like Biocon and Dr Reddy’s who already have built capabilities in Biosimilars.

Negatives

· Though belated, Obama had endorsed the nuclear deal with India, it seems that he will not be content with what so far India had surrendered in the context of non-proliferation of nuclear weapons. He may not recognise India as a nuclear power and may insist on India signing the CTBT, which India has so far refused to do.

· During the long campaign, Obama said that his Govt. would stop giving tax breaks to companies that ship jobs overseas and start giving them to companies that create jobs in the U.S. That could trouble India’s outsourcing industry. Indian BPO gets nearly 60% of its revenue from U.S. companies.

· India is wary that any Democratic administration will include the same proponents of nuclear nonproliferation who opposed Bush’s exemption for India. Obama has publicly said he intends to push for a comprehensive test ban treaty, a treaty that India opposes because it feels its own nuclear deterrent remains incomplete.

· Obama has said it will put climate change at the forefront of its global policy concerns. If the focus is about mitigating carbon production through technological means, there will be few concerns. However, if the policy slips into more coercive measures such as carbon tariffs and the like, the result is likely to convert climate change into an energy security struggle. It will also pit the big carbon emitters of the future, like India and China, against present polluters like the United States and Europe.

· There is also a belief in India that the Democrats treat India worse than the Republicans do.

Kautilya’s Arthashastra

“Kautilya’s Arthashastra” (Scripture of Wealth) is the oldest book on Management on this earth, rooting form Rig Veda. The Arthashastra deals primarily with Economics, Politics or Statecraft and Punishments (Dandanit), where the main focus is on Creation and Management of wealth. Since ages, rulers across the world have referred Arthashastra for building a nation with sound economics and spiritual values. Kings in ancient India like Ashoka and Chhatrapati Shivaji had learnt this book and followed it to expand their kingdom multifold (increase market share), to protect the kingdom against powerful enemies (develop a strategy against competitors), develop winning strategies, habits and practices.

Here presenting you some of his thoughts of management, which are still much relevant in today’s corporate world:

· In his Arthashastra, Chanakya lists seven pillars for an organization. “The king (The leader), the minister (The manager), the country (Your market), the fortified city (Head office), the treasury (Finance Deptt), the army (Your team) and the ally (friend / consultant) are the constituent elements of the state”.
· As in the present day management, the importance of vision, mission and motivation was captured in Arthashastra as Kautilya advise his swamy (King) to rule through Prabhu Shakti (vision), Mantra Shakti (mission) and Utsah Sahkti (motivation).
· For Kautilya “governance, polity, politics and progress have to be linked to the welfare of the people”. Interestingly, Indian democracy runs on the same track- “Democracy is for the people, by the people and of the people”.
· For him, Mitra as a constituent of the State would come first, if another king attacks Swamy’s kingdom. It will also be the duty of the Swamy to help Mitra if another king attacks the Mitra. In today’s world of globalization, the same concept is applied when corporates form alliances to arm their territories from external dangers such as cheap imports and the entry of strong competitors.
· Kautilya tells us how to handle a strong king who has evil designs as well as a weak king who has catapulted easily. To defeat the strong king, he advise networking with other kings defeated or threatened by the strong king on one hand and develop nuisance value through ‘nibbling by the sides’. To a weak king who easily surrenders, Kautilya advise his Swamy to give the king his dignity and not to rub his nose in the defeat. This way Swamy will have a useful friend who will never forget the treatment received and will remain ever so grateful. Same in case of today’s corporate world, when Mergers and Acquisitions are going on to cut down the competitors.
· Kautilya believes in “diversified Economy”. For him, Diversified economy should consist of productive forests, water reservoirs, mines, productive activities, trade, markets, roads, ports, and storages. The same happening with India as it is diversified in Agriculture, Industrial and Service sector proportionally. Mutual funds are another name of diversification to minimize the risk.
· Arthashastra says, “If no men you transact with lose, then you shall not.” Today’s corporate world following these words. Values, ethics and socially responsibility have become their business strategy and they genuinely believe that the interests of stakeholders. Most big companies are building social issues in their business strategy.

Creation of wealth
Money is just a tool as a means of exchange, whereas Wealth is what you own after a lot of hard work and self-efforts. Arthashastra gives us tips to understand the principles of creation of wealth at Micro and Macro levels.

Wealth Creation at Individual Level: The foremost thing one has to learn to create wealth is, “Wealth is not only what is with you, but what is IN you”. Material possessions are not wealth. But the real wealth is what is within us…our character, our vision, our ideals, our knowledge and our talents. The first step is to identify our inner strengths and inborn talents where we are naturally good. The next step is to develop it. Undergoing training provided by experts in that field can do this. Many people get struck when they do not succeed and their mind starts playing tricks and seeks external support. This is when they start consulting astrologers, palm readers, future predictors, forecasting stars etc. Kautilya warns us not to get trapped in this mental confusion. “Wealth will slip away from the foolish person, who continuously consults the stars; for wealth is the star of wealth; what will the stars do? Capable men will certainly secure wealth at least after a hundred trials”.
‘Law of the seed’ work here, there might be fifty peers on a tree, each with ten seeds, i.e. five hundred seeds, but why would we need more seeds just to grow few more trees? Nature always teaches something, it tells us that most seeds never grow. So if one really wants to achieve something, one has to try more than once. Successful people fail more often. But they simply plant more seeds.

Wealth creation at State and National Level: Kautilya says, “The countryside is the source of all undertakings, from them comes power” The real wealth of a nation is in its rural areas. Our 70% population still lives in villages. Rural people are close to nature and nature actually gives us wealth…mines, forest produce, agriculture…The closer we are to natural resources, the more powerful we become. Our countrymen living there got the talent; it’s our duty to give opportunities to these people by spending time and energy doing research on the potential natural resources which can create employment for the country. “What is a weed? A plant whose usefulness has not yet been discovered”. India, as a country, has amazing hidden potentials in the countryside. We need to explore them for the benefit of one and all, without affecting the natural ecological balance, “Be ever active in the management of the economy because the root of wealth is economic activity; inactivity brings material distress. Without an active policy, both current prosperity and future gains are destroyed” The root of wealth is Economic activity. We can see a lot of activity happening in India, causing more and more wealth flowing into our country. A young Entrepreneur sees opportunity all around. In addition, the government’s open door policy of globalization has helped businessmen to become aware of customer’s needs, and to move out of their earlier attitude of complacency. “Just as elephants are needed to catch elephants, so does one need wealth to capture more wealth” As law of nature is – to keep moving. Same with the case of wealth. Wealth needs to flow to new areas so that more wealth is created. If we want to earn more wealth, we need to let go our accumulated wealth. Kautilya says that an elephant lives and moves in groups; hence, in order to attract a wild elephant, he makes use of another elephant. So, if you want to earn more wealth, put your current wealth assets to good use.

 
Conclusion
Kautilya’s Arthashastra is a Library on Management. It is a technique by which you can create a good and permanent business model. Some may ask, “Is this book written over 2400 years ago still relevant in today’s world?” Arthashstra is a work whose relevance has not faded even after centuries. It is the book about the management of the ‘human mind’, which has remained the same since ages. So long as human beings require self-control, discipline and management, ‘Kautilaya’s Arthashastra’ will remain relevant.