Infosys and Slowdown

I am really surprised by the view of the pepole regarding impact of global slowdown on large IT companies. I really feel things have been blown out of proportion without understanding the business model of Indian IT companies and their reason of existence in global value chain. you might be thinking what the hell I am thinking of, when all leading analyst feel otherwise, with due respect to there views lets us understand where exactly business model of Indian IT companies makes impact and what is there role in value addition?

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If u have a closer on look on US, It has been facing the problem to grow as economy not just this year but since the start of the millenium. It is since then Indian offshoring industry has started gaining bones and flesh. Indian offshoring industry has never ever provided any innovative services which there european or american counterparts couldn't provide (yes, sorry to sound anti-mera bharat mahan but it is true). Then why we existed and growed reason is very simple - american companies were unable to scale further but 50-100 bps point rise in margins makes there financial growth look spectacular.

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What is the most important contribution of Indian outsourcing industry to global supply chain? - It is delivery by pepole who are more proper for its execution. That is what in management terms called RIGHT MAN AT RIGHT PLACE. Righteousness is not just decided by the efficieny but also by the cost at which delivery is made (not to be confused by drop in quality) so now same quantum of work is done by some sitting different part of the world.

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That is what Thomas friedman (three time pultizer prize winner) coined as flattening of the world in his book "The World is flat".

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And if you got it right our reason for emergence in global supply chain was-

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True Globalisation: After the 2000-01 is what I consider world has started understanding the true potential of globalisation, previously it was meant to be way of gaining scale for american and european companies with help of there government by asking to remove the protectionist policy by practised by the developing countries. But after 2000-01 a newer type of reveloution started in global economy which started changing game of global expansion which was somewhat 200-300 years started by american and european explorers. But Indian companies started changing by suppling the labour in cheaper quantity of by using the broadband (on which extensive investment were made in pre dot-coms era) this globalisation of product to services also faced the protectionist policy from america and other european countries (restriction in H1-B visas

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Global Value chain : Now the value chain has been globalised, 'right people' are adding value to the chain. One point should always be rembered that Indian companies are providing same services which were previously provided by there american and european counterparts but at the cheaper rates, by outsourcing major chunk to India.

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Slowdown: In case of the slowdown again gaining scale will be difficult and for survival expansion through reducing margins will become crucial and now the protectionist policy of west will take hit as they will forced to open up there supply. Indian companies have very small pie of global IT spending and it is so strategically divided that in event of slowdown the larger portion will be chopped first and it will divided in to Indian players.

Chain Reaction - CLSA

CLSA: The IT industry's impact on the Indian economy

Based on an online survey of over 42,000 IT professionals, CLSA has come out with an interesting study - titled "Chain Reaction" - about the impact of the growth of the IT industry on the Indian economy.

Where IT makes an impact
From FY08CL, India?s IT exports are set to exceed its net oil imports.

! The IT sector will pick up over 80% of India's employable engineers and 60% IT-employable graduates? Addressing one-third of the urban employment challenge.

! We estimate that each IT job will create at least 1.4 other jobs in the economy.

! We forecast IT to account for 20-25% of Indian GDP expansion over FY07-10; transform Indian cities; and, as the sector matures, drive innovation in the country.

Spending trends among IT professionals
! IT alone can absorb 70-75% of residential and two-thirds of forecast commercial FY07-10 real estate demand. Realty demand forecasts seem conservative.

! We see the segment supporting two-thirds of five-star hotel-room additions and one-third of budget hotel expansion over FY07-10.

! We predict IT professionals will personally fund 20% of incremental domestic travel.

! An important contributor to financial services development, IT workers account 20% of online trading accounts, and 12% of credit cards.

! IT workers will also drive 17% of new home loans over FY07-10CL.

! They will also account for 13% of car sales; 16% of A+B-segment car sales; and one-third of demand for multiplexes over FY07-10CL.

As they age, as they earn
! We see further spikes in consumption trends for the 28-35 age bracket particularly home/car ownership, and healthcare and leisure spending.

! IT professionals spend US$1bn annually on eating out? and nearly US$ 700m annual healthcare costs.

! All these areas will get a boost in coming years we estimate 500,000 IT professionals will move into this age group in the next three to four years.

Rate hikes to keep bean counters soaking

The worst isn't over. It may be wiser for India Inc to prepare for more interest rate hikes in the coming days. The chairman of prime minister's economic advisory council, C Rangarajan, has warned India Inc of the possibility of further interest rates hike and to factor in higher interest costs in their future planning to mitigate adverse impact of interest rate hikes.

Justifying the monetary measures initiated by the Reserve Bank of India, Mr Rangarajan underscored the need to contain inflation that can be achieved through various monetary measures the central bank has recently taken. High inflation is inconsistent with high growth in the long run. Policy makers need to do a balancing act of keeping inflation low and maintaining the growth momentum, he said.

Prudent policy measures in 1995-96 helped avert the impact of the Asian crisis in 1997. Similarly, the monetary authorities are right in taking the measures at a time when money supply growth is high in order to prevent future troubles. Corporates must also factor in the possibility of rising interest rates.

Inflation cannot be brought down if money supply growth is high and, therefore, there is a need to keep inflation low by restraining money supply growth and credit growth, he said. Sustained high inflation could be counterproductive and also have adverse impact on savings. Mr Rangarajan was addressing a round table discussion, An economic architecture for 10% GDP growth, organised by the Bombay Chamber of Commerce & Industry in Mumbai on Monday.

Although inflation was much higher in the 1980s and 1990s, it was against the backdrop of high global inflation. However, inflation has come down globally, and, therefore, there is a need to moderate inflation now, he said. As a result, the acceptable levels of inflation for the economy are also much lower now.

One of the signs of overheating in the economy is when inflation and current account deficit are running high. In India, inflation is running higher than the accepted level of 5.5%. Regarding current account deficit, it is not likely to exceed 1% of GDP. However, trade deficit is high at 6-7% of GDP as the surpluses of the services sector have helped to offset the trade deficit to an extent.
Thus, it cannot be denied that there are signs of overheating, he said. However, he said, overheating at present is cyclical in character and we should take care to prevent cyclical overheating from becoming structural overheating. It is in this context that a greater emphasis on availability of power assumes importance.

He outlined six challenges for the economy to maintain the high-growth momentum. These include stepping up agricultural growth, infrastructure development, fiscal consolidation, building social infrastructure, managing globalisation and good governance. Source:ET

Economists Everyone Should Know.

Sure, the next time you're laid off, salaried down, underbudgeted, or wearing hand-me-downs, you could blame the economy. But why pick on the economy when you can pick on the economist instead? 1. Adam Smith (1723 - 1790) Ever felt a push from behind on your way to work, but when you turned around no one was there? It was probably Smith's "invisible hand," the force that leads individuals pursuing self-interest to provide useful goods and services for others. Champion of the free market, Smith pretty much founded economics as a systematic discipline, and his ideas echo through the profession to the present day. If you don't believe in economic forecasting, read Smith's masterwork, The Wealth of Nations (1776). Smith, a native Scot, argued that Great Britain couldn't afford to hold its rebellious American colonies - an impressive conjecture considering Britain's world domination at the time. 2. David Ricardo (1772 - 1823) Ricardo became the poster boy for middle achievers everywhere when he came up with the idea of comparative advantage. He showed how free trade allows countries to specialize in what they do best - even if they're not very good at anything. The same principle explains why Michael Jordan doesn't fix roofs, even though he might be better at it than many roofers; it's more efficient for him to focus on basketball. Disinherited for marrying outside his family's Jewish faith, Ricardo was originally a successful banker in London, then a mamber of Parliament, before he became an economist. In his "Essay on the Influence of a Low Price of Corn on the Profits of Stock," Ricardo presented the law of diminishing returns, which explains how adding more labor and machinery to a piece of land (or other fixed asset) after a certain point is just unproductive. 3. John Maynard Keynes (1883 - 1946) Before Keynes , economics was in its classical phase. After him, it was in its Keynesian phase (just as there was Newtonian physics before Albert Einstein came along). The Great Depression convinced Keynes that the government had to engage in deficit spending to combat unemployment, a major break from the economic thinking of the time. He first became well known after World War I when he quit his British Treasury job, complaining that the Treaty of Versailles would wreak economic havoc. (He was right.) He also helped set up the system of fixed exchange rates used for decades after World War II. Unlike the majority of economists, Keynes led the life of a celebrity: he married a Russian ballerina, drank Champagne with literary figures, and made a fortune in the stock market. Keynes once said, "I would rather be vaguely right than precisely wrong," which may account for continued arguments between "new Keynesian" and "new classical" economists. 4. Joseph Schumpeter (1883 - 1950) Scumpeter , born in Austria, reportedly vowed to become the best economist, horseman, and lover in Vienna - and later regretted not meeting the horseman goal. He argued that economists' traditional idea of competition (similar companies competing on price) was much less important than "creative destruction," whereby entrepreneurs create new products and industries. He predicted that capitalism would be undermined by its own success. But unlike Karl Marx, Schumpeter didn't look forward to the system's demise. He wrote, "If a doctor predicts that his patient will die presently, this does not mean that he desires it." 5. John Kenneth Galbraith (1908 - 2006) Galbraith once said, "The only function of economic forecasting is to make astrology look respectable." A prolific author and adept debater, Galbraith stands among the economists best known outside the economics profession. The Canadian-born Galbraith moved to the United States in the 1930s and worked as a price controller in World War II, a Harvard professor, an advisor to President John F. Kennedy, and eventually a U.S. ambassador to India. A persistent concern of his long career has been with corporate power. In such books as The Affluent Society (1958) and The New Industrial State (1967), he argued that big companies have little to fear from competitors and exercise lots of influence over consumers. Not everyone liked the thesis, of course; critics have pointed out that big companies sometimes lose market share and go out of business. 6. Milton Friedman (1912 - 2006) Friedman advocated free-floating exchange rates, school vouchers, the shift from the draft to a volunteer military, and for doctors to be allowed to practice medicine without a license. A proponent of free markets and limited government, Friedman challenged the Keynesian ideas that dominated economics in the decades after World War II and instead supported monetarism, an emphasis on the role of money in the economy. Born to immigrants in New York City, Friedman spent much of his career at the University of Chicago. In 1976 he won the Nobel Prize for economics for, among other things, "his demonstration of the complexity of stabilization policy" - meaning, why government has so much trouble keeping the economy on an even keel. His fame, however, only grew. In 1979 Friedman's book Free to Choose (coauthored by his wife and accompanied by a public-television series) reached a worldwide audience.

Barclays Says Yen to Drop to 125 on Shift in Savings

The yen will slump 5 percent this quarter, the worst start to a fiscal year since 1989, as Japanese invest more of their savings overseas, said Toru Umemoto, chief foreign-exchange strategist at Barclays Capital.

Individuals are seeking higher yields because the Bank of Japan may not raise its 0.5 percent benchmark interest rate until the third quarter, said Umemoto, the most-accurate yen forecaster last year in surveys by Bloomberg News. The currency will drop to 125 against the dollar, he said, the weakest since December 2002.

The yen has fallen against the 16 most-actively traded currencies over the past month, with the biggest losses suffered against those with higher yields such as the Australian and New Zealand dollars. Households gained confidence to invest offshore after Japan's economy grew at the fastest pace in three years in the fourth quarter, said Umemoto.

``The yen's downtrend will continue as Japanese, who are fed up with low returns, will continue to export capital,'' Tokyo- based Umemoto said in an interview on April 2. ``Individuals will play the leading role.''

Overseas assets held by Japanese households reached 46 trillion yen ($387.6 billion) in 2006, only 3 percent of their total financial holdings, based on Umemoto's own calculations.

`Not Particularly High'
There is ``room for households to shift money from safe but low-return deposits to riskier, higher-return assets abroad,'' said Masafumi Yamamoto, a strategist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan currency trader. ``The Japanese ratio at 3 percent does not look particularly high.''

Yamamoto is less bearish on the yen than his counterpart at Barclays, predicting the currency will fall to 119 a dollar by June 30. He said Japanese overseas holdings rose 27 percent last year from the previous year, citing data compiled by the Bank of Japan, monthly data from the Investment Trust Association Japan, and Citigroup's own estimates.

Japanese mutual funds boosted purchases of assets abroad to about 40 percent of the total from about 8 percent in 2002, according to the Investment Trust Association. The mutual funds now have about $244 billion of assets denominated in foreign currencies, including $98 billion in the U.S. dollar.

Higher Yields
The yen weakened 6.0 percent versus the New Zealand dollar and 5.5 percent against Australia's currency in the past month. Australian and New Zealand 10-year government bonds both offer a yield premium, or spread, of 4.20 percentage points over similar- maturity Japanese debt. Securities in Germany give an extra 2.4 points.

The ratio of Japanese household savings parked in banks and post offices accounted for about half of their total financial assets of 1,550 trillion yen, compared with 10 percent in the U.S. and 30 percent in Europe, Barclays' Umemoto said. That will continue to decrease as more funds go abroad, he said.

Credit Suisse and Fortis Bank were the two most bearish for the yen among 49 contributors to a Bloomberg survey last month, forecasting losses to 125 and 127 against the dollar this quarter. The median estimate was 117.

The yen gained 1 percent last quarter as some global funds exited carry trades, where they borrow and sell yen for better returns elsewhere, because of a global slump in stock markets. Local Japanese investors are taking their place with their own form of carry trade. (Bloomberg)

Ugly Dance of Democracy - UP election scenario

The affidavits of 785 candidates contesting the first phase of the crucial Uttar Pradesh assembly polls make appalling reading - almost 131 have criminal cases pending against them, with the Bahujan Samaj Party (BSP) leading the pack.The BSP has 22 candidates followed by the Samajwadi Party (SP) 19, the Bharatiya Janata Party (BJP) 16 and the Congress 15 with criminal cases. In the last assembly elections in 2002, 32 of the 62 seats going to polls on April 7 were won by candidates facing serious criminal charges (and our PM, President and FM are talking about increasing rural contribution in GDP)

According to Uttar Pradesh Election Watch (UPEW), a non-partisan body of citizens, 11 candidates had not bothered to mention they had any criminal cases pending against them though the state government's website says all of them have pending cases. At least two dozen independent candidates with criminal backgrounds have also thrown their hat into the electoral ring.

• Leading the pack is Mumbai blasts accused Abu Salem, who was in fact the first one to announce his candidature from the Mubarakpur assembly seat.
• Then there is another don, Babloo Srivastava, who was extradited from Singapore five years ago and has now decided to contest the Lucknow central seat.
• Besides, Raghuraj Pratap Singh alias Raja Bhaiyya, is back in the poll field as is Seema Parihar, the accomplice of slain dacoit Nirbhay Gujjar.

Charges against many candidates vary from murder, theft and rape to extortion and banditry. In seven constituencies - Jasrana, Hamirpur, Firozabad, Lalitpur, Agra Cantt, Kanpur and Aliganj - there were more than five candidates with pending criminal cases. UPEW also disclosed that political parties had also nominated many candidates with criminal records for the remaining phases.

For an election that is bound to see big money power, UPEW found to its horror that a whopping 509 candidates did not have a permanent account number (PAN) card, a must for all income-tax assesses.The Congress party candidates led this dubious distinction followed by the BSP, SP and the BJP. Among the top 10 candidates with high liabilities, one Congress candidate with a Rs.3 million loan did not have a PAN card. There were 74 candidates who declared financial assets worth more than Rs.10 million and the SP led the team with 17 candidates followed by BSP 14, BJP 14, and Congress 11.

Bibhu Mahapatra of the Association for Democratic Reforms (ADR), an election watch organisation, says this time around their campaign has had some effect."If you look at the 2002 results, of the 62 seats that were going to polls in the first phase, 32 seats were won by candidates with serious criminal charges. This time around it is only 24 percent of the contesting candidates. So the voice of the people for cleaner polls is making an impact. It is a process." (They are Kidding.........right).

Some intersting reasons for rise in Inflation

Here are some intersting views of readers on internet on rise in inflation (current scenario in India):

• There are 101 reasons why inflation may happen.But which reason is biggest contributors as of today? Well, it is because RBI-Gov is printing busload of curreny notes (Rs 72000cr in past 52 weeks, some 17% of volume back then) and as a result M3 exploded by Rs 450,000cr in 52 weeks (some 18% of base back then).Now do you expect prices to decrease?---The crude price increased for SAME reason. The M3 supply of US was rising at 5% to 7% a year. And crude supply increased at the reate of 2% to 3% a year. Despite wars, the total supply of crude did NOT drop. So war is NOT a reson why crude price went $30 in 90s to now $50 to $60.--There are 10s of other reasons. But above is most important as of today.
• Inflation is ONLY and EXCLUSIVELY due to the increase in the monetary mass, including paper and coin currency, government debts, fractional reserve banking credits as guaranteed by government etc.It is IMPOSSIBLE to have inflation through demand when the monetary mass remains fixed. Inflation = General increase in prices. Demand pressure = Increase in prices in the sector with higher demand, DECREASE of prices in the sectors with lesser demand, which is exactly what you want to get from a monetary system!!!This is called FEEDBACK: higher prices attract producers to the sector where demand is high and capacities are too low, while removing them from those areas that have low demand.If you can produce a mathematical model by which the total monetary mass stays the same but all prices rise and total turnover remains the same or increases, but it would be magic, not mathematics. "external supply shocks such an increase in the oil prices may lead to an overall increase in prices without there being an increase in the money supply"Sorry, MATHEMATICAL IMPOSSIBILITY!!! Something has to give, so some products DROP in price or completely disappear from the market, hence the added unemployment.So the statement that "all prices rise" is simply false.Price will rise for those goods that have a rigid demand, while goods with a flexible demand MUST lower their price or will lose in sales volume.This is exactly what happens with VAT: supposedly, producers can simply pass on the tax to consumers, but this is not at all what happens. Since ALL prices can not go up simultaneously and at the same consumption level, unless government increases the money supply by the VAT rate, almost all businesses will lose some income - some more, some less. Some because they don't "pass on" the tax, some because their volume will drop.Very few business will be able to maintain their sales and income intact, because the demand for their goods or services is rigid, but only at the expense of some other businesses.
• Interest rate = Inflation+ Risk premium + Cost incurred + Profit. So if inflation increases then interest rate increase while its opposite i.e inflation increase due to interest rate increase is not right statement. One example of this is Japan where interest rate is almost zero because there is no inflation.
• To understand how interest rates impact inflation - inflation first needs to be split into two types: demand drive and supply driven. Typically demand driven inflation starts from a low interest rate regime, which in turn creates a demand for credit. This channel translates into more money in the hands of people and a demand driven push takes place driving to higher inflation. In this case the central bank hikes policy rates, which then drives banks to raise rates. As the price of credit i.e. interst rates rises, the demand for credit declines. The impact of interest rates on inflation in this case is a function of (a) intial level of rates and (b) rate of capacity creation in the economy. If the initial level of rates is close to rock bottom as was the case for the US economy before the Fed started raising rates during the last round, then it maybe a while before they begin to bite. It may take about two years or so before any real impact takes place (though again this is dependent on the kind of monetary policy that is being followed).In the second kind of inflation i.e. supply driven, as in the case of an oil shock etc, interst rates make less of a material difference to inflation levels to start with.