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Global Crisis --Indian Corruption 25-12-11

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Global Crisis --Indian Corruption 25-12-11 Powered By Docstoc
					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




                                                                                                                  Oceania
                                    Asia




                                                                                           L.America+Cari
                                                        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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