Global Economic Crisis – Immediate Solution

Global Economic Crisis –  Immediate Solution

The turbulence we are going through is unprecedented in the world History. What started as A financial  institution failure, affected not only the leading financial institutions in the world but also the major developed economic systems in the world leading to a systemic failure.

Unlike in the past , when it had an impact on only a few  countries and few asset classes, this time, the crisis had its effect on almost all countries in the world and all asset classes. The crisis had a contagion effect and spread far and wide without an end in sight creating more and more uncertainties day by day.

When Government creates  stimulus it goes to increase the government debt making the government vulnerable to financial weakness. In a few cases , where there was a government failure,  investors have taken an hair cut in their investments. But in General, Sovereign debt is supposed to be more trustworthy since Central Banks can print money to lend it to the government when in need.

Governments in an effort to stop economic slide, tried many measures including Monetary and Fiscal Stimulus but black swan events had overtaken the efforts of governments. Many of the developed countries printed more money  and tried to stimulate the Economic Growth and reduce the unemployment. But it has gone into a spiral. The only effect is the outstanding debts of governments are going up, their credit rating is being downgraded and there was a lot of trust deficit between governments.,Banks and investors.

Everybody is in a dilemma searching for solutions and  immediate remedy. The effective  solutions are eluding the policy makers.

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According to Classical Economics, Printing money is likely to increase the demand, inflation and reduce the value of money. This is true in cases of countries  where the potential for high growth, high employment levels and low debt repayment needs exist.

Economic History has proven that only a few countries at any point in time  have high economic growth rates and those who were growing at high rates for long periods of time will see a decline in growth and potential for growth is almost negligible.

The developed countries which are affected by crisis today has less potential for growth , less opportunities for providing additional employment and supply exceeding demand levels for many of the product categories. The scope for stimulating the domestic demand and increasing  inflationary tendencies are limited.

The need for new money creation has to continue in these economies till they achieve an economic balance but with a difference. The classical economic theories were created when the world was very simple, the financial architecture in the economies  were very simple, the products available in the financial market were very simple and transparent. The world was not integrated like today. The theories proved right, whenever there was an economic crisis.

But we are living in a modern world with many factors influencing the economic performance and it is very difficult to exactly quantify the impact of each factor on the economy. The present crisis gives an impression that there is no solution in sight. There is a fear, gloom and high level of uncertainty.

The crisis in Europe today is due to high level of government debt which was created because of the  high acceptance of debt denominated in Euro issued by member countries. Only the Monetary union happened and to some extent economic integration.  There was a total absence of Fiscal Union and Political Union and lack of full economic integration. There is a need to move towards a fiscal integration and member countries should give the mandate to Germany and France to evolve a fiscal system within Euro Zone as if it is a Federal Structure. The Fiscal union is the immediate need.

The crisis today is due to Debt at Country Level , Province/State Level, Municipal Level, Corporate level and individual level. All the players in the system are affected but the degree of impact varies on each stake holder. Unlike in the past, it looks like the issue could not be resolved within a short period.

One solution seems to be in sight, that is the way in which the debt levels could be reduced for all stake holders. This could be achieved through creating money by Government without adding debt to its balance sheet. That is to just print money and allocate to all the Stakeholders based on criteria to be evolved which will ensure the  viability of the macro economic system, banking system, corporate sector and individuals who are indebted. The amount of money to be created depends on the need of all the stakeholders. It could be capped at 25% of the money in circulation today. This strategy might require, control of inflation within specified levels and managing the currency exchange rate within a specified levels. Since the actions taken in one country will have impact on all other countries in the world there has to be a coordinated action which is facilitated through a body like IMF. This strategy will change how Economic systems function, Capital markets work and transmission of money takes place. How this system will work can be tested through applying  this concept to the  most affected country in the world today and see the results in six months and if after effects are manageable then  this concept could be implemented in other countries.

Introducing this system will make the economic systems viable. Improve the liquidity, bring back the trust levels. , removing the gloom and doom and make the financial systems functional. Today, financial systems are in a limbo and their traditional roles in financial sector have been totally hampered . The employment levels will go up.

Adopting the above strategy might require a close coordination of Fiscal and Monetary functions in a country and both Fiscal and Monetary policies have to be developed in an integrated manner. There has to be an increased integration between all the regulators in a country and continuous exchange of information on the developments in each domain.

The Analysis to be done and the parameters to be tracked.

Analysis of Debt  with the average maturity period of the debt with Aging profile.

At the Country Level

State/Province  Level

City/Municipal Level 

Corporate Debt

Individual debt.

Criteria for determining the Printing of Money without Creating Debt for the Government

Total Debt in the system / GDP

Government Debt / GDP

External Debt / GDP

Repayments/ GDP

External Repayments / Reserves.

Forex Reserves / Negative Balance

Budget Deficit

Current Account Deficit

GDP Growth Rate /Potential Growth rate for next 5 years.

Interest Rates

Inflation and the likely trend in 5 years.

Unemployment level. and the likely trend in 5 years.

Distribution of Money Created.  

The end use of money created should go to reduce the debt levels of stake holders including investment in Equity capital . The government can invest in Equity capital of Banks and Companies. Whenever governments had given stimulus in the form of investments in shares of companies, when there was a boom , governments were able to exit the investments at good profits.

There has to be a careful deployment of the money created and as per the criteria to be developed in consultation with a body like IMF, World Bank.

These are my initial thoughts and this concept could be further refined and modified after discussions and debates. Hope adopting this approach would help to address the issues before the world leaders in the Short term.

R.Kannan

Managing in a Volatile Economy - A Corporate perspective

The challenges for corporates are many in this volatile Environment. The Corporates have to tread with caution and assess as many risks as possible and be ready with the response to maintain a steady performance.

Economic Environment

• Expectations of Economic Growth had shown a declining trend in developed countries.
• US and Europe are affected in a big way and back to old normal will take a few years.
• Corporate Sector outlook in many countries had shown a negative trend.
• Asian countries offer promise in Economic Growth
• Customer sentiments are very positive in the Developing countries
• The developing countries have to take the lead in sustaining the global economic growth.
• Focus is shifting to the Real Economy activities.
• Regulators have started discouraging the Profiting from Derivatives and just paper transactions
• There will be increased regulation.
. There will be increased volatality in the performance of Economies, Corporates, Markets and different asset classes.
• The old method of forecasting and the available statistical models can not address all the imponderables.
• The inflation is likely to come down to 7% and then to 5% within a year.
• The Economic growth this fiscal would be between 8 and 8.5% and depending on global developments, the prospects for the growth will evolve in future.

Challenges for Corporates are many
• Managing a multi country operation
• Main challenge is how to manage volatility in Demand, Costs of inputs and managing Cash.
• Robust Financial and Performance Planning
• Ensuring predictable performance
• Measurement of Risk
• Be ready with an appropriate response for various types of risks.
• Introduction of new reporting standards by regulatory authorities
• Profiting from speculation will come down

Strategies to be adopted
• Develop a highly flexible organisation and Financial Architecture.
• Reduce the level of Fixed costs in the system and increase the variable costs.
• Strategic outsourcing of activities and follow asset light strategies.
• Focus on Cash generation
• Focus on Core business and reduce the income from financial and derivative transactions.
• Scenario planning and be ready with response for all possible scenarios.
• Hedge the input costs and output price at the budgeted levels.
• Monitoring of performance at regular intervals including daily, weekly and monthly depending on the need.
• Monitor supplier and Customer performance closely.
• Develop a good risk management system and monitor all types of risks continuously.

Air India Strategy

Kindly go through this link

http://corporatestrategy3.blogspot.com/

Retailing in India

Retailing in India

India has one of the best retailing systems in the world. The industry is totally fragmented and has the highest level of penetration across the length and breath of the country. This industry has the largest number of entrepreneurs in India.

The adoption of this model in countries where the unemployment is very high, would help to create many more entrepreneurs and resolving the unemployment problem .

India is the only country where a retail outlet could be seen in every street corner whether it is a town or a village.

The leading category in retailing is Food and in other categories are gold and mobile phones.s leading the table.

There were many attempts by Business groups to establish a very large Organised retail chain in India. Many a times, the companies were not able to implement this concept with big success especially in Food and Grocery items, since the value delivered by a local retailer was not matched by a large retail chain. Since retailers are a large entrepreneurial class, they were also able to wield influence in the society and able to curtail the efforts by large players in consolidating this industry.

Small retail provides lot of opportunities for entrepreneurs. When I was travelling in interiors of the county, I saw the small and village level retail has even spread its wings to retailing in other products categopreis. Earlier , the retailing was taking place in a big way only in food and grocery. Now we can find shops selling Textiles, Pharma, Electronics , Telephones and even Jewellery.

In a small retail, many players were able to achieve a Profit Before tax on Sales of close to 20% . Whereas in the case of large retailers, hardly they are able to achieve a Profit Before tax of 5% with great difficulty even after achieving a gross margin of 30 35%.

For small retailers, the operations are very simple and easy to manage.

For small retailers, the productivity per sq.ft is the highest sometimes going upto 100 times of a large retailer.

Small retailers offer small packs, which makes the buying affordable for all the sections of society. The buyers need not buy in large packs and store for long periods of time. Storage increases the cost in terms of inventory cost as well as additional cost on food/grocery items becoming stale and not good for use.

For small retailers, the overheads and expenses are very less in delivering the service. Whereas in the organized retail, the expenses on Rent is between 6 – 8% on sales, Salaries are between 4- 7%, Interest on working capital, wastages going up to 3% on sales and payment of taxes.

In fact, the cost structure of large retailers is unfavourable and large retailers have a very clear disadvantage of 16% on sale compared to the small retailer. If the large retail is not managed well then it increases the loss of cost competitiveness further.

Due to space constraints and increasing purchasing power of buyers, the large retail formats are not able to make the experience of buying pleasurable. One of the constraints is in providing parking space for large number of customers.

As of today, there are not too many managers in the Indian system with the capacity to manage the large store formats in an efficient manner.

The systems and procedures are still not uniform and it differs from store to store for the same retail chain. There is lot of discretion for store managers. Whereas in mass retailing, there is a need to follow well defined systems and procedures without having too many exemptions, discretion by the local managers. Local managers can have disecretion to decide the product portfolio of a store depending on the region based on the consumption pattern but not the administrative systems and procedures.

In vegetables and fruits, large retail formats are not able to deliver consistent quality products. The quality differs from day to day and from hour to hour. Many a times poor quality products are displayed and stock out is observed in these items.

There are still many issues relating pricing, bar coding and counter management. Many a times, there is a need for intervention by the person who is preparing the bill to manually intervene to input the prices which is leading to errors in billing and customer complaints.

Since all the products are not having a proper bar code and automatic billing , this reduces the efficiency of the billing and counter management. Counters become a major constraint in deciding the number of customers who could be served by the system. Counters decide the capacity to serve the number of customers.

Organised retailing is not able to take off in a big way due to all the above reasons especially in food and grocery categories. .

To make a large successful Organised retail chain, the following points could be taken into consideration.

1. Choose the right product mix. Emphasis should be on non perishables and items which are not sold in a big way by small retailers.
2. Follow a strategy of creating a few model stores on the format. Address all the issues relating to Store Management, Procurement, supply chain, wastage management, billing system and counter management. After making this a big success, then replicate the same model across many centres .
3. Organisation structure. Managing a large retail is more complex than managing a small retail. There are different businesses involved. The first business is the store management followed by Supply chain management and Real estate management. Each business requires different skills . Hence three separate entities to be created for each of the above. Since Indian entrepreneurs have still not mastered all the above aspects, it would be in the best interests to enter into JV’s with those who are experts in the above fields either from India or from abroad.
4. Systems and procedures. This is the key for success of the retail. Even small inefficiencies in the system , wipe away the little margins achieved by large retailers and sometime resulting in losses. This area requires more attention than the attention provided today and this area to be given the prime importance in managing the retail business.
5. Large retailers have to create strategic alliances with the small retailers in the catchment area and wherever the direct market penetration would be difficult, they could look at indirect penetration in the market through distributing private lable products through the small retailers.
6. To have better control, instead of spreading operations thin all over the country, make the expansion fast within small territories to start with and then go for national expansion.
7. Create as many private labels as possible especially in Food and Grocery and start marketing to small retailers. Quality of products should be given the prime importance.
8. Present in the entire value chain. Right from production of Agri produce to packing and branding the products and marketing them.
9. Adopt best practices in Financial and inventory management. Reduce the wastages in the system through ensuring quality at all levels.

Link to the budget views

http://budget-opinion.blogspot.com/2011/02/rkannan.html

Tuesday, February 22, 2011R.Kannan
India is in a best position to do very well in the world economy today. The growth momentum in the last two years need to be continued. This is the time Indian Industries and Services require the continued boost for development. There is a need to continue the stimulus in the budget this year and increase the planned and non planned expenditure by at least 15% this year. The schemes relating to Rural and Urban poor should be continued . A minimum GDP growth of 9% could be set as the minimum target for growth. To meet the increased expenditure, there will be a need to mobilize more resources. The borrowing by government could be kept at last years’ level and interest rate expectations on the borrowing should be kept at the present levels which would help to moderate the inflationary expectations. To bridge the funding gap, innovative methods for mobilizing funds from non conventional sources including Capitalisation of land bank ( which US government has identified as one of the sources of funding in this budget ), additional collection from Telecom operators and mining licenses. Sectors like Agriculture including milk production have become profitable now and there is a need to review the subsidy to this sector and target the subsidies. A specific fund could be created for removing the bottlenecks in Infrastructure sector to use the available capacities in a optimal manner. A specific fund could be created for developing an organisation, systems and procedures to remove the mismatch in Demand and Supply of Agricultural commodities. Commercial Banks could be allowed to raise Infrastructure bonds and interest from these bonds could be exempt from tax.

Union Budget – F 12

Union Budget – F 12
The budget was much better than the expectations of various stake holders in the Economy. There was a concern that the Stimulus given would be withdrawn by the government.

Government had seen the benefits of reducing the excise duty which has resulted in above average growth in the industries where the stimulus was very effective. The stimulus has been continued which should help to maintain the industry growth at high levels. The higher growth rates in the industry would compensate the lower excise duty.

In terms of revenue, the collection on account of taxes is likely to go up by Rs.1 trillion and the same level of reduction has been assumed in non tax revenues. Higher taxes would come from higher level of industrial , services growth, higher average crude price during the fiscal 2012 compared to fiscal 2011 and additional duties on mining. It is quite possible, the government would be able to raise additional Rs.50000 cr to Rs.75000 cr on account of non tax revenues which is possible through various sources.

The government has kept the overall expenditure growth rate target at 3.4%. This would be possible since there is no effect of sixth pay commission and there is an apparent strategy to control costs including the subsidy through better targeting of beneficiaries, the government should be able to control costs. The oil prices could play spoilsport in achieving the targets. The oil price is not likely to go below $ 70 this year and in the short term it might reach the historical peaks and will subside to reasonable levels during F 12.

Increasing the limits for investments from abroad in Corproate bonds , Infrastructure bonds and Mutual funds is likely to attract more investments from abroad and give a good impetus for Industrial and Infrastructure growth and there will be a multiplier effect on the Economy as well as the stock markets. Higher capitalization of Public Sector Banks would increase the lending capacity of these institutions. Inflow of funds into India will also help to mobilize the large untapped domestic savings for Infrastructure and Capex of corporate.

Government borrowing has been kept at the low levels which has removed the fears of crowding of government papers in the market and the inflationary expectations are lessened on account of this budgeted target.

Agriculture has been given a good boost. The credit target for agriculture has been enhanced. Several schemes were announced which would help to optimally utilize the agricultural inputs and resources. This should also help to reduce the bottlenecks in the supply chain of Agri products and should result in reasonable prices of agri commodities. With a good management, it should be possible to achieve a growth of more than 6% agriculture since our productivity levels of crops are still much below the best yields in the world.

Strategy documents have been prepared for various ministries and systematic approach to managing the economy has been put in place. This will result in improvement of systems and procedures adopted by various ministries and help to achieve the desired expense targets.
The outlay for Rural development has been kept at the same level and 22 lakh Anganwadi workers has been given a good increase in wages. Coupled with the stimulus for agriculture this should help to increase the growth of the rural economy.

There is an increased allotment for Urban development and JNNURM which should help to accelerate the growth in the urban areas.

Apart from the specific measures in the budget, there was a mention about the various bills to be passed in parliament. By taking into confidence the opposition parties, the government would be in a position to pass these bills which will provide further opportunities for increasing the economic growth rate and revenue streams for the government.

Overall, considering the present global economic scenario this is an attractive budget which should interest the investors from India, NRI’s and MNC’s from abroad.

India 2011 – Outlook

India 2011 – Outlook
I am happy that the following predictions of mine had come true.

1. Continued stimulus measures by Developed countries in the world.
2. My prediction for India's Economic growth last year and this year.
3. Adoption of a concept of Permanent Crisis Management Mechanism by Euro Region based on my concept of Permanent Stimulus for Economic Growth as in my blog.
4. Higher mobilization of funds through non conventional sources by Government.
5. Capitalisation of land bank in the case of sick PSU’s.


Positives :

• US, Europe will take some more time to go back to the old robust balanced growth in the economies.
• The countries from Asia will continue to support the global economic growth in the next few years.
• Economy is likely to grow at a rate of more than 9% and the growth can go up to 9.5%. If we factor in the rise in Agri commodity prices in the last two years, this sector of the Economy must have grown at much more than 8 / 10 per cent and our Actual GDP growth must have crossed already 10 per cent. Some how , this is not reflected in the GDP growth statistics so far.
• Growth will be driven by consumption increasing among the Government employees and Rural Population ( aided by increase in food prices).
• Infrastructure will continue to grow fast since many large groups have planned to implement large power projects and Road projects.
• Indian rates of interest are very attractive. There is likely to be a big level of carry trade and further FII investments. There will be a pressure on the rupee.
• Many of the corporates have restructured their operations during the crisis and have become nimble and flexible in their operations.
• Most of the corporates have repriced their products services in this inflationary scenario, which has helped to achieve much higher profit during the year. The main beneficiaries are in FMCG sector.
• Most of the large corporates have big plans for growth , diversification and cross border acquisitions. Apart from the funds available locally, they are raising, planning to raise funds from other sources.

Risks to the Growth

• Risks to individual fast growing Industrial and services sectors on account of latest developments in relation to the regulation and competition in these sectors.
• Rupee appreciating making our exports uncompetitive.
• Oil Price climbing above $ 100 a barrel. Fanning the inflationary trends. Since we meet more than 80% of our oil requirements through imports.
• Food price inflation and inflation in all other products .
• Increase in Interest rates
• FII withdrawals from the Indian market.
• Political uncertainities


Sectors which can give a good growth and profit Potential

• Commodities trading
• Investment Banking.
• Mining
• Agriculture

Sectors with good growth potential

• Banking and Financial Services
• Pharma and Healthcare
• Realty
• Power and Unconventional Power
• Auto and Auto components
• Road Development
• Education
• Media and Communication
• IT and ITES
• Venture capital

Sectors with good growth potential but not assured profits.

• Positions in Commodities and Currencies.
• Telecom
• Retail
• Airlines
• DTH
• Microfinance
• Life Insurance.
• Mutual Funds.