[abs182]

Originally Posted by Hayek

Some thoughts. Exchange Rates are fundamentally determined by the balance between Capital Flows and Current Account Flows. Changes in both of these reflect the competitiveness of economies - so your exchange rate is a messenger, telling you how you are doing. Of course like all market based messengers, it is not perfect - it is influenced by sentiment, and may over or under react.

Now that's a very thorough brief on the raging dollar/INR crises. Being a finance guy myself I thoroughly appreciate your brevity.

More than the structural problems with the Indian economy it really amuses and surprises me that having such eminent (and I use the word 'eminent' advisedly!) economic thinkers in the PMO and FM office. None of these people had the guts to tell the high command that her populist initiatives will push us to the brink.

More than the impeding withdrawal of Fed's QEs and our CAD etc. The things which we could've controlled i.e. Pay commissions, loan waiver, NREG, etc would have still left us in a good stead today despite the global problems. The last hurrah for the government seems to be the food bill. Rightly said apart from Mr. Sinha no one's looking at the long-term price the country will end up paying. Like its rightly been said 'The road to hell is paved with good intentions' .

But one major theme that doesn't get duly discussed is this:

After any country's belt tightening the subsequent governments blow the country's finances out of the park. After the Bill clinton handed the ripe economy to Mr. Bush he expanded the governments balance sheets and expenses beyond recognition.

Mr. Blair in his almost decade long rule blew the finances of UK to such an extent that I'm pretty sure that subsequent 2 UK govts will do nothing but try and clean up the mess by reducing the expenses and the government.

Similarly Mr. Obama's first term was immediately overwhelmed with the cleaning up and restarting the US economy which had been sickened by "Dubya's" wars.

Similarly coming to our home scene. The NDA tried its level best to put the house in order. They were also helped by the efforts of the 1990s were also bearing fruits. We were almost out of the woods and bang the UPA jing bang came in and voila. They saw the possibilities of furthering their left leaning policies on a scale which hadn't been done before and they immediately went to work on it. The result will be same. Beyond 2014 no matter who forms a government or its a hung house. The subsequent govt will definitely spend most of their time cleaning the floor after the party.

I know I've transgressed from the actual debate but looking at the current crises with the backdrop of political ideologies and their ramifications makes the reasoning more vibrant I think.

All comments are welcome.

Note: My comments aren't at all an advocacy of any political group. But the swing in economic pendulum from 'Left' to 'Right' is pretty evident lately.

[RS_DEL]

The fact that the RBI & the IAS inspite of attracting some of the best intellectual power in India are not able to effectively manage the country's economy is perplexing to say the least. They just need to remember the episode that got Mr Soros the notoriety/fame ( depending on your point of view). The BoEngland tried to defend the GBP when the fundamentals were dodgy. The market lead by Mr Soros as one of the principal players in the short trade hammered the GBP and the BoE had egg all over their face. The boys and girls at the RBI and North Block should NOT have forgotten this. Yet they did. As they say those who forget the lessons of history are condemned to repeat it. So much for the fire fighting prowess of the Indian powers that be!!

WRT to the reasons for the collapse - @hayek has covered it succintly and brilliantly. No need for me to dwell on that. Simply put, the fundamentals of the INR are dodgy( I am being charitable here). All that was required was some large trader with deep pockets needed to put on a short trade - and in due course gravity would do it's work. That is what happened. News now coming out suggests the fall was triggered in the Non Deliverable Forwards market overseas. The response of the powers that be in India? Panic! Panic creates fear. Fear creates even more fear and greed creates even more greed - basic nature of all financial markets. Now the talking heads were paraded on TV with forecasts which suggested even more doom. As this was happening I suspect the big guys were covering their shorts. So they made humongous sums of money. We are left to carry the can.

WRT @TSK's posts. The information he provides is telling to say the least. If the producer gets pennies on the dollar i.e. a pittance and the middleman is taking the bulk of the end price - that is testament to a rotting system. A system that is beyond repair and salvage. It needs to be junked in-toto. Please go back to the debate in the country and also on this forum about the FDI in retail and ensuing hue and cry. That is the kind of revolutionary change we need and the tribe of the middle-men needs to be taken to task. This is not ranting. Please understand the supply/distribution chain is rotten to it's very core - it is causing huge amounts of inflation which does not get reported in the inflation data. Any economy having inflation of such high proportions can not have a strong currency.

A weak currency, dependence on imported energy, critical inputs for agriculture to be imported, no substantial manufacturing activity for export, freebies to the unaware population ( who do not realise nothing is free in this world) i.e. subsidies which never reach the beneficiaries and are misappropriated - we really are not India Shining or what the current dispensation would like us to believe.

[aaggoswami]

I, for one, hate economics as a subject, but reality drags me into it. Moreover, for any scenario the three visions are important : Political, Social and Economical.

Here are my views :

1) Oil consumption. As vasudeva mentioned, we cannot go back. The subsidy blanket used to cover cold blooded government actions/oil mafia/corruption, etc. must be removed.
On one hand, we are shown subsidy, and on the other hand we are slapped with indirect tax.
This is where we all, as a nation, must get enlightened.
Govt. OMC are parasites, dont ask me how. I think all of us are well aware of the answer.

2) Corruption : The biggest impact is from this dept. No roads = more travel time and more fuel being used. Is this not affecting our BOP ?
Remove or atleast decrease this, but it will not happen any time soon.
Like TSK1979 said, farmers get way too less and others get rich. We are basically farmers, but after independence a lot of our very fertile land was simply grabbed by govt. and hence we had to urbanize. A few relatives still manage in villages and the stories they tell are horrible.

we have electricity for malls, but not for farmers, atleast that is the image they get. Leading to theft, their image as thieves prevents govt. to provide further facility.

3) A car has thousands of parts. A common man wants his car to run properly if its used in normal manner and gets it serviced. Similarly, common man might not understand economics, but if at all he manages to be a tax payer, expects govt. to provide him economic, social and political security.

The day we have more uniform tax, more tax payers, good governance and less corruption, we will not have such difficulty.
We are still buying defense equipment from outside. Why ? Are we not having enough tech ? NO. We are capable, but corruption is not letting us have a self sufficient defense system.

As an individual working for a firm which exports quite a bit, the strong dollar is not letting us export more. Its not higher imports are only killing us. We need to identify what are factors leading to higher imports. For once, forget Oil and then recalculate all things. Machinery, technology, etc. are also killing. Corruption is eating away the money which can be used for a lot of long and short term constructive activities.

[nmo]

There is a interesting article at: http://www.newslaundry.com/2013/08/hawala-logic/.

The implication here is that Congress party gains from rupee devaluation as it brings in its dollars stashed abroad to meet election expenses. While I may not go as far as to agree with this inference, it certainly makes interesting read.

The article is also attached as a word doc with this post.

[Saanil]

Almost everyone I know has been talking about the fall of the rupee for the past 10 days. As far as my understanding goes, INR is depreciating because people are valuing it so. People think INR is not worth 50 or 55 but at current rates it should be around 65.

Just think of INR as a stock (like Bharti Airtel shares). Price of Airtel will rise if people are confident in it and the company shows good performance thereby achieving good profits. Similarly I think of INR as a stock of India. Price of INR decreases because people are not much confident in it OR India has not been performing well. BHPians have already discussed the reasons for India not performing well.

In my opinion, the RBI will increase interest rates to curb the falling rupee. Growth might come under pressure but I think there is too much liquidity in the system which the RBI might target by increasing rates.

Note that just actions of the RBI alone will not help in achieving a stable country. The government also has to compliment the RBI. Goverment also needs to formulate policies which will make India attractive. I think the government is busy trying to prepare for next elections rather than focussing on doing their job properly.

I think we should be prepared for a rising interest rate environment. We will just have to accept that 64/65 is the value people are giving to the rupee. If the government wants people to assign more value to the rupee, India will have to show some good performance.

It all boils down to the golden corporate mantra - you show good performance and you will be rewarded. Fail to act and you will suffer.

[voyageur]

Originally Posted by tsk1979

I remember, long time back Exports were exempt from Income tax. Then the exemption was withdrawn. I wonder why. Shouldn't the govt be encouraging exporters? If you earn Foreign exchange for the country, and buyer is abroad, why the need to pay tax in the country? I find it highly illogical that income from exports which brings in forex is taxed.

Not only the above mentioned tax system, most of the law in India makes less sense. I blame everything that's going on here on corruption. That is the one and only thing which is ruining the country.

Last night, I had a message from one of my friends saying that some high officials had traveled to Jaipur from Delhi via Sao Paolo.

[nkrishnap]

Originally Posted by voyageur

Last night, I had a message from one of my friends saying that some high officials had traveled to Jaipur from Delhi via Sao Paolo.

The LTC scam in the making . More such cases will be found for sure thanks to the attitude of the Govt Employees who want to misuse the LTC.

[drmohitg]

Originally Posted by voyageur

Last night, I had a message from one of my friends saying that some high officials had traveled to Jaipur from Delhi via Sao Paolo.

Yup thats a new scam that has apparently been brought to light by TOI. Officials claiming inflated travel allowances. One example was this Jaipur to Delhi via sao Paolo. Another was Port Blair to Bombay via dubai. The most demoralising thing about this is that the higher up authority that is supposed to pass these allowances after due scrutinization are also equally corrupt.

[tsk1979]

The funniest thing is that most actual culprits are not in net. A reliable source tells me that people from his office who like to travel to places like Manipur/Andemans or other off beat pleases are bearing the brunt, because they are being questioned how a domestic ticket can cost 80000 etc.,

[voyageur]

Originally Posted by tsk1979

The funniest thing is that most actual culprits are not in net. A reliable source tells me that people from his office who like to travel to places like Manipur/Andemans or other off beat pleases are bearing the brunt, because they are being questioned how a domestic ticket can cost 80000 etc.,

I doubt any actions will be taken against these people, simply because of our law systems. There are too many loopholes and people with power and money are just taking maximum advantage of it.

There is inflation, high taxes, scams and lack of good political leadership. If all these keeps going, I see a major uprising like the one in Egypt.

[tsk1979]

Originally Posted by voyageur

I doubt any actions will be taken against these people, simply because of our law systems. There are too many loopholes and people with power and money are just taking maximum advantage of it.

There is inflation, high taxes, scams and lack of good political leadership. If all these keeps going, I see a major uprising like the one in Egypt.

No, there will be no uprising. Traditionally, the India DNA is hard coded to believe that the Raja can live in Opulance while the populace starves. Have you heard of popular revolt against the Raja before the Britishers came?

[voyageur]

Originally Posted by tsk1979

No, there will be no uprising. Traditionally, the India DNA is hard coded to believe that the Raja can live in Opulance while the populace starves. Have you heard of popular revolt against the Raja before the Britishers came?

Ya, you are a 100% right. There was a mini uprising in Delhi for weeks. Did that change anything ? Was there any rule or law put into practice ? Answer is plain NO. Its sad indeed, but it is the truth.

[acroback]

Originally Posted by tsk1979

No, there will be no uprising. Traditionally, the India DNA is hard coded to believe that the Raja can live in Opulance while the populace starves. Have you heard of popular revolt against the Raja before the Britishers came?

Originally Posted by voyageur

Ya, you are a 100% right. There was a mini uprising in Delhi for weeks. Did that change anything ? Was there any rule or law put into practice ? Answer is plain NO. Its sad indeed, but it is the truth.

May be you are true or may be not.

There is no more powerful way in a legit democracy to revolt than boo out a non-performing government.

Dilemma is who will replace them?

[Kool_Kid]

I do not claim to be an economist But why does every one keep on blaming fuel subsidy.
Lets assume the value of crude oil at Rs 10 ( Please do note that the 90- 150 $ quoted is per barrel ) So what does the Government does, It taxes it at 100- 120 % ( divided between central government and state government)
So the effective price we pay is 22 Rs ( but out of which 12 or 120 % is going back to the government). The Government will keep on talking about subsidy where as they are actually making huge amount of revenue on sale of it. Why do not remove the tax or reduce it to help commoners.

Government of Goa has removed the state tax. so this can be done

I think that we should continue with so called Oil subsidy as this is the only thing which reaches to poor without much leakage. All essential items are distributed by road ( in absence of good rail network). So the cost of all the goods are influenced but it. Its the best way to help and reduce actual inflation.

This Government wants to remove poverty by removing poor. The revenue generated by taxing oil in pumped into election schemes like food subsidy bills. These will never reach poor they will only reach the middle man.

Recent example of corruption : I saw a news about the Delhi Chief minister planning to construct a flyover of 1.5 KM for 250 Cr. I was curious to know if the PWD would be putting gold bricks to justify that kind of investment for 1.5 KM of flyaway.

Some know fact which you would never read in any main stream news paper or channel (One of my relative worked in Public Oil company told me)

1) We are importing 80 % of current consumption, Rest 20 % is being manufactured at less 30- 35 $ per barrel. Should that not help in brining down the average rate ( 80 + 20) . It really does help but the government will never discuss it .

2) The agreements to procure the oil are for fixed cost at minimum 6 months contract. So even if today oil was 100 $ per barrel , we are still paying 70 $ which was the agreed at the time of contract . Contrary to the popular belief we do not haggle for the price every day. ( the Government will like us to belive that we are paying today rate to justify another fuel hike)

Barrel = 119.240471 liters

Originally Posted by tsk1979;

No, there will be no uprising. Traditionally, the India DNA is hard coded to believe that the Raja can live in Opulance while the populace starves. Have you heard of popular revolt against the Raja before the Britishers came?

I would like to belive that they will , Do remember the post 1977 ( Energency) people threw out the Rani . Do not underestimate the people .

[acroback]

I understand economics angle of current crisis.

But I fail to understand this :- How come Realty market just keeps inflating and inflating even with economy in doldrums with a weak Rupee? Why are people fueling this balloon ?