News channels to buoy business
The International Monetary Fund (IMF) released its Global Economic Outlook for 2003 and it makes some interesting reading for India, says Dr Dasgupta.india Updated: Jun 07, 2003 21:29 IST
The Indian Babble
The International Monetary Fund (IMF) released its Global Economic Outlook for 2003 and it makes some interesting reading for India. The IMF thinks that the growth in India will be at 5.1% for 2003, a number which was echoed by the United Nation's Economic and Social Commission for Asia and Pacific (ESCAP).
The ESCAP as well as the IMF attribute this decline to the Iraq War and SARS but paint a brighter picture for the next year, with the IMF projecting a growth rate of 5.9% for 2004. While inflation and external balance of payments are under control, the IMF went on to talk about key reform priorities including civil service reform, broadening tax bases and improving tax administration, addressing governance problems, and reducing contingent liabilities (including by strengthening banking and pension systems).
The fiscal deficit is moving up steadily to 10% of GDP and one day, somebody will have to do a Manmohan Singh again on this. Watch out for that day, because that is when the shibboleths of the politically motivated subsidies, budgeting and expenditure classes will be shattered.
The BSE Sensex trended downwards during the week, traded in a narrow range with average volumes. Tuesday displayed hints of a gentle upward trend and continued on till Wednesday but on Thursday, the markets took fright and assumed the downward trend, once the IT Sector moaned about its quarterly results.
News channels will help businesses
An interesting development, which will make a change to the Indian business scene is the launch of the several 24-hour news channels. The business press has looked on the 24-hour news channels purely from the perspective of companies who are launching the channels. A deeper economic long term impact will be seen. The economy and the financial Markets work better when the investors and participants are better informed.
These 24-hour news channels will include business news, and I expect the knowledge of the common investor to increase. One hopes, that with the increased knowledge of the markets amongst the general populace, it will make them move from the current propensity to invest in non-value adding assets, such as gold and land. The current average middle income earner has a large
proportion of his assets in the government securities and many rely on this income. This is a financial straight-jacket for the government and any diversification away by the citizens will be a double benefit for the government.
The IMF report gave rise to a fascinating nugget of information, which is somewhat related to the increase in information for investors and citizens. One of the IMF reports has found that Indian government responses to disasters and crisis's are more effective in those states where there is a higher newspaper circulation. This is a small and bright shining light in the otherwise rather bleak wasteland of government and bureaucracy.
The Babble in the Ivory Towers
Now let us take a peek from the trenches to the ivory towers. The Iowa State University in the USA recently released a set of papers relating to Crop Insurance. Iowa is one of the breadbasket states in the USA, producing soyabean and corn, along with feedstock/animal production. It is also one of the top agricultural export states, extremely fertile and frequently suffers
from depressed farm prices. This has necessitated a good and strong financial insurance infrastructure to handle crop and farming related crises.
Some of the types of insurance available to Iowans are Multiple Peril Crop Insurance (protection against production losses from natural causes), Catastrophic Insurance (protection against catastrophic loss in yield from natural causes), Crop Revenue Insurance (protection against loss
in crop revenue or income), Group Risk Plan (protection taken by associations or geographical units in Iowa for covering against losses on a group/county wide basis) and Supplemental Coverage (such as hail insurance, price caps/floors etc).
India's GDP in 2002 dropped a full point, due to the drought situation across most of the country. While the public sector banking institutions in the villages, cooperatives and urban mandi's are reasonably well positioned to offer standard financing services, crop insurance is still in its infancy from the banks or financial institutions.
The Indian financial institutions should start increasing their product range and offer better insurance products to our farmers. Besides the obvious benefits to the farmers, the general agricultural economy will be better served with the impact of droughts and agricultural poverty reduced. Once a crop has been destroyed, due to hailstorms, pests, flooding or drought, it takes well over 4-years for the small scale farmer to recover from the catastrophe. Insuring crops,
crop revenues, yields and the like, will help in obviating this critical sector of the economy. Let us also not forget, that there is a possibility for the world agricultural sector to be liberalised and our farmers require as much support as possible starting now!
The Babble in the world
The world markets were rather indecisive over the shortened week, but ended up on a high note, with positive data coming from the US chip industry, South Korean chip manufacturers and a favourable forecast from Nokia about good growth prospects for mobile telephony. The Dow traded in a 200 point range over the week, buoyed by a good set of earning numbers from a rather
broad range of companies. People will be touching wood, but this does look like a good omen for the markets.
The Easter holiday period also played its part, with traders moving into optimistic territory and pushing values up. With the good news coming from the IT sector, the NASDAQ rose about 3% over
the week. Volumes were up as well across the board. The Footsie Eurotop 300 also displayed a rather hesitant but upward trend over the week, with Nokia leading the charge. The European insurance and re-insurance sector seems to be catching its breath after a spate of bad news over the past couple of years and the sector lifted slightly. London ended the week up, based on
good numbers coming from the US corporate quarterly earnings reports and the heating up of the takeover battles in the UK.
Over in the Far East, Seoul and Tokyo perked up at the news of better semi-conductor orders, but Hong Kong is on the elevator going down, with the property sector taking a big hit and volumes were very low. Perhaps the face masks mask the legendary HK Chinese trading appetite.
The Fixed Income markets were behaving in a disconnected fashion, specially over on the JGB's showing rising yields (the 20 year JGB bond broke through the 1% barrier!) while there are reports of Japanese pension funds moving out of low yielding JGB's and domestic equity stocks into higher yielding Eurobonds. This has not translated into significant movements of the
Eurobonds yet, but the expectation is that the market will see better support in the coming weeks. There is a row brewing in Germany with the rating agencies blaming the German Government of obstructing their work.
Watch out for a downgrade. While this may not have an immediate impact, over the medium term, this will make bond financing for German companies more expensive.
With the equity markets in the dungeons, a difficult fixed income market amidst a widening budget deficit is the last thing the Mittelstand need. Overall, the bond markets are in uncertain territory, with the post-war environment being hazy, conflicting economic news and a short trading week. The oil markets and the central bankers meetings coming up in the next
few weeks should provide some direction.
Over on the foreign exchange markets, the Euro reached a 2 week high against the dollar and a 4 year high against the yen (driven by the demand by Japanese pension funds) but the market expects that this level will be maintained. Given the general rise in the indices in the equity market and some rather good corporate numbers and the post war environment, the market
thinks that the dollar will dip a bit more, but will then rise over the medium term. The yen market seems to be thinking about the Bank of Japan intervening in the yen - dollar market, if the weakness in the dollar persists over the next few weeks.
Volatility in the commodity market has reduced in the post-war environment and the ranges have narrowed considerably. Gold was trading in a steady small range, and the latest buzz is the introduction of cash and derivatives trading in bullion in India from June 2003, lead by ICICI, LIC and other Indian institutions. This will help in mopping up reserves and make the
market more liquid in India.
Over on the trade front, the sanitary, phytosanitary measures committee of the WTO agreed in principle on a procedure for governments to make known the flexibility given to developing countries when they apply new measures on food safety and animal and plant health. This is of importance to India, especially given India's bio-diversity and large agricultural society and will allow India to manage health and agricultural crises better.
(Dr Bhaskar Dasgupta works in the City of London in various capacities in the banking sector. He also lectures at several British Universities. He holds a Doctorate in finance and artificial intelligence from Manchester Business School and is currently working on another doctorate at Kings College in international relations and terrorism.
He will be writing a weekly Monday round-up on markets and indicators.)