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Global Crisis—Indian Corruption
R. Vaidyanathan
Professor of Finance and Control
Indian Institute of Management
Bangalore-560076
Vaidya@iimb.ernet.in
http://www.iimb.ernet.in/webpage/r-
vaidyanathan
@Prof.R.Vaidyanathan;iimb;2011
1
Axis of Economics Shifted to
Asia
• Asia as a major economic power
• China /India – Combined population of
more than 2 billion
• 19/20th Century to the West
• 21st Century is to the East
• Davos this year did not talk of Globalisation
@Prof.R.Vaidyanathan;iimb;2011 2
Share of World GDP from 0 to 1998
Year 0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998
Western 10.8 8.7 17.9 19.9 22.5 23.6 33.6 33.5 26.3 25.7 20.6
Europe
Former 3.4 4.6 5.9 6.2 7.3 8.7 11.7 13.1 13.1 12.8 5.4
USSR + EE
USA 0 0 0.3 0.2 0.1 1.8 8.9 19.1 27.3 22.0 21.9
Latin--Am 2.2 3.9 2.9 1.1 1.7 2.0 2.5 4.5 7.9 8.7 8.7
Japan 1.2 2.7 3.1 2.9 4.1 3.0 2.3 2.6 3.0 7.7 7.7
China 26.2 22.7 25.0 29.2 22.3 32.9 17.2 8.9 4.5 4.6 11.5
India 32.9 28.9 24.5 22.6 24.4 16.0 12.2 7.6 4.2 3.1 5.0
Other Asia 16.1 16.0 12.7 11.2 10.9 7.3 6.6 5.4 6.8 8.7 13.0
Africa 6.8 11.8 7.4 6.7 6.6 4.5 3.6 2.7 3.6 3.3 3.1
World 100 100 100 100 100 100 100 100 100 100 100
[including
Others
Source: Table-B-20 Appendix B; pp263; The World Economy: A millennial Perspective—Angus Maddison OECD Development Centre Studies --2007
@Prof.R.Vaidyanathan;iimb;2011 3
Introduction/1
Three powerful forces have impacted the global
financial system in a fundamental way:
– Globalization
– Information Technology /Telecommunication
– Convergence
@Prof.R.Vaidyanathan;iimb;2011 4
Globalisation: Three Waves
• Product / Markets Globalization –70’s /80’s
[Shifting Manufacturing to China other Asia]
• Financial Markets [ Global Financial Flows]
Hedge Funds/PE/VC/ etc
• Labor Market Globalization
– Latinos in USA/ Africans in EU/Off
Shore/Outsourcing to India
[This Globalisation is not greeted by the Developed
Economies]
@Prof.R.Vaidyanathan;iimb;2011 5
Current Crisis in Developed
World
It is Anglo-Saxon Economic Crisis
Economic
Demographic
War between Abrahamic faiths
War Between HOMGENISERS
Westernization versus Islam
Secular Europe Versus Islam
Church versus Islam
@Prof.R.Vaidyanathan;iimb;2011 6
Share in % of world GDP based
on PPP--
@Prof.R.Vaidyanathan;iimb;2011 7
Overall Debt % of GDP
CANADA= 259 %
RUSSIA= 71 %
UNITED STATES=296%
CHINA= 158 %
BRAZIL = 142%
INDIA= 129 %
BRITAIN = 466 %
JAPAN= 471 %
GERMANY= 286 %
SOUTH KOREA=332%
FRANCE= 322 %
SWITZ= 314 %
SPAIN= 366 %
ITALY = 315 % @Prof.R.Vaidyanathan;iimb;2011 8
Debt as Percentage of GDP
@Prof.R.Vaidyanathan;iimb;2011 9
Government Debt % of GDP
@Prof.R.Vaidyanathan;iimb;2011 10
Household Debt % of GDP
@Prof.R.Vaidyanathan;iimb;2011 11
Financial Debt % of GDP
@Prof.R.Vaidyanathan;iimb;2011 12
Non –Financial Debt % of GDP
@Prof.R.Vaidyanathan;iimb;2011 13
World Population By Region
70
60
50
40
30 1900
20
10 1950
0
2000
Africa
N.America
L.America+Cari
Asia
Oceania
Europe 2050
bbean
2100
Source: United Nations Dept of Economic and Social Affairs - Population Division: Quoted in ― Key Issues in Insurance,‖ --David M.
Holland, F.S.A, President & CEO, Munich American Reassurance Company. ---World Risk and Insurance Economics Congress, August 8,
2005,Salt Lake City, Utah, USA
@Prof.R.Vaidyanathan;iimb;2011 14
Integrated Markets and Contagious Crisis
Financial distress is contagious [ like HNI] since it is
passed on sometimes deliberately
It was Greece/Ireland but now it can be any
European country
Credit rating agencies under pressure—credibility
dented
India could escape due to de-coupling
Globalization has a flip side
@Prof.R.Vaidyanathan;iimb;2011 15
Sovereign Credit Rating
Country/Agencies S&P Moody’s
India [Foreign Currency Rating] BBB- Baa3
[Local Currency Rating]
Not given Ba1
Spain[FC] AA Aa1
LC AA --
Ireland [ FC] A Baa1
LC A Baa1
USA [ FC] AAA Aaa
LC AAA --
China [FC] AA- Aa3
LC AA- --
Japan [FC] AA Aa2
LC AA _-
Source: Financial Express—21-12-2010
@Prof.R.Vaidyanathan;iimb;2011 16
Focus on Tax havens
In search of the lost [ and last]Dollar
Lichtenstein Bank and Germany
Credit Suisse and Germany
UBS and USA
France and HSBC
It is estimated nearly 18 tr is in tax havens and G-20 is
trying to regulate/get this
India’s Illicit wealth 500bn to 1.5 Tr USD
FATF[ Financial Action Task Force] formulating
black/gray lists.
Switzerland under pressure
@Prof.R.Vaidyanathan;iimb;2011 17
War Against Corruption –Several Movements
Globally German /France leads
Due to Great depression/ Terrorism
Liechtenstein Bank/HSBC Geneva/Dutch-Finland Data
Bofors / Hasan Ali
Corruption imply Black money
Black money can be without corruption
Black money in tax Havens—LKA/BRD/Dr Swamy
Domestic Corruption– ANNA/ Dr Swamy/Sri Sri
Anna Wants New Regulation
Existing system based– Dr Swamy
More than New laws Persons matter-- --Seshan / Vinod
Rai
Autonomy for CBI is important
@Prof.R.Vaidyanathan;iimb;2011 18
India– Domestic/ Foreign Black Money
Distinguish Between Domestic and Foreign Black
Money
Domestic is mostly used in economic activities—
except drugs/terror/human trafficking etc
Foreign is due to
• Trade Mis-pricing—Under/over invoicing
• Commission on projects/defense purchases
• Earnings abroad by Bollywood/Sports/Artists
• Also kept in the form of gold/ stones etc
Why? Heavy taxation in the sixties/ Exchange
control/ Worry of stability
@Prof.R.Vaidyanathan;iimb;2011 19
Foreign Black money
Distinguish between
Pure Tax evasion[ Veg Black money]
Terror/Drug/Trafficking related [ Non- Veg]
• Treat them differently
• Create Commission –statutory to bring it
back
• Create SPV to sterilize it and use it
@Prof.R.Vaidyanathan;iimb;2011 20
New Paradigm in this Globalization
Asian axis has characteristics
• Family Centric cultures [West has
Nationalized families and Privatized public
systems]
• Savings oriented rather than consumption
driven
• Community oriented in terms of practices
• There are several buffers between the State
and individual unlike Western model
@Prof.R.Vaidyanathan;iimb;2011 21
Growth of Our Economy due to--
• It is not global Crisis– Anglo-Saxon crisis
• It will take more than 80 quarters for recovery of
the West
• More De-coupled better for us
• Domestic demand driven growth
• Domestic –Household savings [not due to
FII/FDI]
• Non-corporate sectors are Engines of Growth.
• They are Community oriented and family driven.
• Funds have to come to India
• India story is just starting
• Every Pothole is an opportunity
@Prof.R.Vaidyanathan;iimb;2011 22
Advantage—Culture
• Hindu/Buddhists traditions based on conflict avoidance and not just conflict resolution.
• All paths leads to God –No My Way or Highway-
• Cyclical Weltanschauung rather than Linear perspective
• It is based on acceptance/harmony and not just tolerance
• In his address at the Tri-centennial Celebrations at Harvard University in 1936, titled
The Indianisation of China, noted poet and President of Peking University Dr. Hu Shih
declared interactions between China and India as having led to unprecedented ―peaceful
cultural borrowing from India by the Chinese people”. Without a single bullet
shot-- India has ruled China for centuries!
• Heterogeneity is the ethos as opposed to homogenization by the earlier Globalization
based on Colonialism and imperialism
• Asian Economy/Culture/ governance is feminine
[ Plenty of Female Goddesses] and so Globalization will have a human face.
@Prof.R.Vaidyanathan;iimb;2011 23
Share of National Income [Percentage Share]
Category 1993-94 2004-05 2008-09 2009-10
Agriculture and forestry, 32.9 19.9 18.3 18.5
fishing
Mining, Manufacturing 18.3 17.0 16.5 15.5
Electricity
Services 48.8 63.1 65.2 66.0
Total 100 100 100 100
Note: We have included construction as part of services; at current prices. Share of NDP
Source: National Accounts Statistics [NAS]—various issues;, Central Statistical Organization [CSO],. New Delhi
@Prof.R.Vaidyanathan;iimb;2011 24
Service Sector--Fastest Growing Activities
• Construction
• Trade—Whole Sale/ Retail
• Transport [other than Railways]
• Hotels / Restaurants
• Real Estate /Ownership of Dwellings and business services
• Other services [professional etc]
@Prof.R.Vaidyanathan;iimb;2011 25
NDP and Growth Rate in different Activities 2004-05 to
2009-10[Rs.Crore and %]
Category 2004-05 2009-10 Growth Rate
Agriculture and Allied activities 527289 602340 2.70
Manufacturing 346495 537156 9.16
Of which Organized 205844 332746 10.08
Unorganized [Non-Corporate] 140651 204410 7.76
Construction 218511 333804 8.84
Trade Hotels and Restaurant 464750 712649 8.93
Of which Trade 424594 653383 9.00
Hotels and Restaurant 40156 59266 8.10
Non-Railway Transport 154791 223658 7.64
Real Estate, Ownership 229767 360319 9.42
of dwellings and Business Services
Other Services 223791 312544 6.91
Total NDP [including other Activities] 2651573 3975429 8.44
Note: The NDP figures are at 2004-05 prices and the growth rate is the geometric average growth rate at constant 2004-05
prices during the period. It is computed from the NAS 2011
Source: Stt 12, Pp 21, National Accounts Statistics [NAS] 2011,Central statistical Organization [CSO], GOI, New Delhi
@Prof.R.Vaidyanathan;iimb;2011 26
Savings Rate and Contributions by Different
Sectors[%]
Items/Year
2004-05 2006-07 2008-09 2009-10
GDS [as of % 32.4 34.6 32.2 33.7
GDP]
Govt. 2.3 3.6 0.5 2.1
Pvt. Corporate 6.5 7.9 7.9 8.1
Household 23.6 23.2 23.8 23.5
Note: GDS: Gross Domestic Savings, GDP: Gross Domestic Product, GDP is at current Market prices. ; Q= quick estimates
Source: Variuos issues of National Accounts Statistics, CSO.
@Prof.R.Vaidyanathan;iimb;2011 27
Savings and Household Sector
(Rs. Crore)
2004-05 2006-07 2008-09 2009-2010
Gross
1050703 1486044 1798347 2207423
domestic
savings (32.4) (34.6) (32.2) (33.7)
of Which
Household
sector 763685 994631 1331033 1536071
(73%) (67%) (74%) (70%)
Source: Statement 18 pp31;National Accounts Statistics; CSO, 2011
@Prof.R.Vaidyanathan;iimb;2011 28
Savings and Foreign flows [Rs. Crore]
Years 1994-95 2000-01 2008-09 2009-2010
Gross Domestic 251463 496272 1798347 2207423
Savings[GDS]
House Hold 199358 446217 1331033 1536071
sector[% of [79%] [89%] [74%] [70%]
GDS]
Foreign 16133 31015 97918 329815
Investment [6.4%] [6.2%] [5.4%] [15%]
Inflow
[ % of GDS]
A. Direct 4126 18406 161536 176304
Investment
B. Portfolio 12007 12609 -63618 153511
Investment
Source: Statement 18 ,pp31;NAS 2011 and Table 155 Hand Book of statistics on Indian Economy Sep 2010 RBI.
29
@Prof.R.Vaidyanathan;iimb;2011
Composition of House Hold Savings 2004 to 2010 [ %]
Item 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Gross domestic Savings
[GDS] to GDP
35 36 38 40 34 36
House hold Savings
[HS] to GDS 70
73 70 67 61 74
Physical Savings
[PS] to HS 57 50 51 48 55 50
Financial Savings to HS
[FS] to HS 59 72 77 69 57 63
Currency to FS
8 9 9 11 14 9
Net Deposits to FS
37 46 56 52 58 47
Shares and Bonds to FS
2 6 7 10 -1 5
Claims on Govt. to FS
24 14 3 -4 -4 4
Insurance Funds to FS
16 15 16 22 23 24
PF and Pensions to FS
12 10 10 9 9 11
Total FS 100 100 100 100 100 100
Source: Stt 73, 10 & 18, National Accounts Statistics 2011; CSO New Delhi
30
@Prof.R.Vaidyanathan;iimb;2011
Gold: Consumer Demand 1995-2011
Countries 1995 2000 2005 2008 2009 2010 2011
(tillQ3)
India 477 855 722 713 579 963 774
Greater China 427 329 293 432 472 607 625
Japan 272 98 74 -11 -9 -32 -18
Indonesia 119 107 81 59 35 36 48
Vietnam 36 60 61 116 73 81 73
Middle East 365 498 388 346 246 238 159
Turkey 139 207 248 210 107 115 123
USA 315 396 377 267 265 233 135
Italy 110 78 71* 50* 41 35 13
U.K 46 65 59* 37* 32 27 11
Total— 2864.5 3287.9 3091.9 3048.4 2503.1 3054.6 2579.5
Including others
Gold price ($/oz) 384.1 279.1 444.5 872 972.3 1224.5 1702.1
@Prof.R.Vaidyanathan;iimb;2011 31
Note: 1 Tonne=32,151 troy oz of fine gold; * Jewellary only
Source: World Gold Council—Gold Demand Trends various issues
FDI—Flows
[USD-Bn]
Country 2004 2006 2008
USA 146 243 320
China 55 78 148
France 33 72 100
Hong Kong 34 45 63
Brazil 18 19 45
India 6 20 41
Mexico 24 19 22
Russia 15 30 73
Chile 7 7 17
Total –Including 752 1499 1823
others
Source: Computed from World Bank Data http://search.worldbank.org/data?qterm=FDI&language=EN&format=html
@Prof.R.Vaidyanathan;iimb;2011 32
REMITTANCES
[USD-Bn]
Country 2004 2006 2008
India 19 28 50
China 20 28 49
Mexico 20 27 26
Philippines 11 15 19
France 12 13 16
Spain 8 9 12
Germany 7 8 11
Bangladesh 4 5 9
Pakistan 4 5 7
Morocco 4 5 7
Total including others 237 317 443
Source: Computed from World Bank Data ;http://search.worldbank.org/data?qterm=remittance&language=EN&format=html
@Prof.R.Vaidyanathan;iimb;2011 33
Indian Stock Markets --Key Parameters
1980-81 98-99 2008-09 2009-10 2010-11
Daily Trading Value-Equity 4 3712 15852 22610 18375
(Rs.Cr.) 1
Daily Traded Value—Debt N/A 365 1412 2425 2270
[Rs. Cr] 2
Daily Traded Value— N/A 413 45311 72392 115150
Derivatives [Rs Cr] 2
No. of Investors (Millions) 3 2 16 19 -- --
No. of Stock exchanges4 9 22 24 25 25
No. of Listed Companies5 992 5848 4929 4975 5067
No. of Scrips listed 5 1674 6969 7729 8072 7910
Market Value (Rs. Cr) 6 5421 491175 2896194 6009173 6702616
P\E Multiplier 7 6 14.81 12.68 21.05 20.04
Note: 1. Pertaining to both BSE and NSE. 2. Pertains to NSE and average for the year .3. Based on SEBI/NCAER survey 2000.4. Includes cash [19] Derivatives [2] and currency derivatives
[4]. 5. Pertaining to BSE 6. Pertains to NSE and end of period 7. Pertains to Sensex shares.
Source: 1. BSE Key Statistics (calculated) and NSE Data Zone for the respective years. 4. SEBI Bulletin April 2011
@Prof.R.Vaidyanathan;iimb;2011 34
FII Investments in India
Cumulative Net
Net Investment at monthly Investment USD[Mn]
Year Equity Debt
exchange rate
1992-93 13
1993-94 5,126
1994-95 4,796
1995-96 6,942
1996-97 8545 29 8,574
2003-04 39959 5805 45,764
2004-05 44123 1759 45,881 35,927
2005-06 48801 [7334] 41,467 45,259
2006-07 25237 5607 30,840 51,967
2007-08 53403 12776 66,179 68,007
2008-09 [47706] 1895.2 [45811] 59081
2009-10 110220 32438 142658 89333
2010-11 - - 146438 121559
Source: Table 12, pp 793 and Table 33 pp 326, SEBI’ Bulletin April 2011
@Prof.R.Vaidyanathan;iimb;2011 35
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