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World trade slows down

Birla's acquisition of an Australian mine was one of the few feel good factors for India this week, says Dr Bhaskar Dasgupta.

india Updated: Oct 06, 2003 18:35 IST
Dr Bhaskar Dasgupta
Dr Bhaskar Dasgupta

The India Babble
Monday started off badly with the Sensex dropping 65 points to 4152 and pharma stocks getting hit particularly badly, due to profit taking after last week? Big rise. On the other hand, cement stocks were up due to increased optimism arising from the good monsoon and potential price rises.

The rupee rose 0.4 per cent(19 paisa) against the dollar after the G7 called for flexible exchange rates over the weekend. The Sensex moved up on Tuesday by 80 points to close at 4231, driven by institutional fund purchases. The same factor was to blame for a further 125 points rise on Wednesday. The overnight good US performance helped in the feel good factor. The derivatives market made the market drop by over 59 points after the September futures expired on Thursday, but on the last day of the week the market recovered smartly by 85 points to close at 4382.

Direct tax collection picked up 4 per centtill September 15, which is rather good news. The country has to increase the direct tax uptake to get away from the system of indirect taxation. The other related news was the fact that the World Bank is proposing to double its funding to India for infrastructure, rural and social development. The Birlas have acquired an Australian mine for AUD 21 mm, which is another good step forward for Indian industry. On the other hand, GE and Bechtel have sued the Indian government for about $1.2 billion in liabilities from the Dhabol plant. That was a complete mess and nobody came out smelling of roses. The new electricity law should make a difference, but it's the SEB's who are the problem. Somebody will have to take care of this problem; otherwise, we will see the emergence of a twin track power sector, which won't be good at all.

McKinsey reports a fascinating factoid about Indian business, namely that Indian workers make three shoes per day compared to 11 shoes by a Chinese worker. Once you factor in the Indian bureaucracy and rampant corruption within the ranks, it sometimes becomes surprising to think that we are actually producing at all. No wonder the finance and industry ministry is keeping the trade barriers up and using anti-dumping duties. If they were lowered, the Chinese will wipe the floor.

Another interesting factoid came around my way. India and Israel want to join into the Galileo project, which is the European competitor to the GPS system run by the USA. This is for weather reporting, position tracking and a whole host of other applications. If this does come up, (China being already part of the consortium), there can be a seismic shift in the way of how a significant portion of the world's equipment works.

The ministerial group on telecom made three recommendations to the cabinet, namely to hike foreign investment limit in telecom services companies from 49 per centto 74 per cent, to allow intra-circle merger of service providers and to replace existing licences with nationwide unified licences. This will definitely create a boost to this very important sector of the economy. Hopefully, these recommendations will be accepted in the near future, instead of the normal three year time frame.

The Babble in the Ivory Towers
A paper by Jennifer Conrad, Kevin M Johnson and Sunil Wahal recently published in the Journal of Financial Economics is, in my opinion, one of the seminal papers in the area of equity trading. The authors use a very rich data set to analyse the use of alternative trading systems by institutions. The authors divide up the orders and corresponding trades into filled by day, after hour crossing systems, electronic communication networks and traditional brokers. Alternative trading systems have grabbed a serious amount of trading volume from established trading venues, such as the NYSE and NASDAQ. The quoted reason is that execution on these alternative trading systems, such as Posit, Lava, Brut, Archipelago etc., is much cheaper than execution on the stock exchanges. Now this paper offers confirmed proof of the same.

Stock exchanges occupy a key point in a nation's economic infrastructure. It is simply a marketplace for trading. Given the rise in technology and changes in market structure, equities trading is no longer required to be done only in the centralised stock exchanges, but is spread out on the virtual world. This does have an adverse implication on the price discovery process, as the market gets fragmented. One assumes though, that institutional investors would be able to cater for this issue. This research shows exactly why institutions are so interested in the ECN, and why internalisation will become more and more popular. This article is a must read for anybody who is interested or working in the equity markets.

Details of this paper and past columns are available on

The World Babble
After the G7 meeting over the weekend, which asked for a weaker dollar, the Nikkei dropped to a three week low by 4.2 per cent after the yen jumped in its value against the dollar for a near three year high to 111 yen to the dollar. Fears rose that the export led growth will suffer for the Japanese economy. Most of the Asian markets took big hits, US treasuries yield spiked up and precious metals were inundated with inflows. The FT Eurotop dropped by 1.8 per cent, while the Dow closed at 1.13 per cent down. Tuesday, the market took on board the fact that a weaker dollar will actually make sense for the European economy and the Dow went up by 40 points and the NASDAQ by 27 points.

Corporate earnings improved and were driven by the major brokerage houses, who reported better than expected earnings. Wednesday saw the oil price shoot up due to the production cuts agreed by OPEC. NYMEX saw the price soar to $28.24 per barrel. Japan suffered from the oil price shock on Thursday and figured it will hit the export led growth recovery hard. The Nikkei was down 192 points. It wasn't as good on the western front either, with the weak dollar and high oil price keeping the indices low. DOW closed 0.9 per cent lower at 9343.

Friday saw the Nikkei ending up slightly higher to close the week at 10318, up by 8.4 points, the DOW closed at 9313 and the NASDAQ at 1792, a drop of 1.39 per cent. Gerhard Schroeder's party took a drubbing at the recent state elections and the interesting part was an opinion survey carried out. Most of the respondents were all for the economic reforms pushed by the chancellor, but the details show a puzzle; nobody wants to pay for them. For example, they are all for the tax cuts, but not for financing them through cuts in subsidiesor increasing public debt. This essentially means that the government is failing to communicate its program properly, because the German people are showing clear signs of ostriches checking out the internal sand structure.

Talking about reform, the current corruption scandal in the European commission shows no signs of abating; the spectacularly thick-skinned European commission is pleading ignorance to the extensive corruption unearthed in the statistical organisation in particular. The particularly slimy way which Prodi and Solbes are using to try and wriggle out of their responsibilities is especially galling. If this is how Europe will be run, the UK is well staying out of it.

Breed for Britain, the new slogan coming up by the opposition conservative party in the UK. The idea being that they want to have more babies, who can then cover the pension shortfall crisis. They obviously do not want immigration and working late into life has its obvious limitations. So, the answer is to have more babies. Nice one. The Financial Times, tongue firmly in cheek, suggests that the government arrange for cutting taxes on contraceptives, removing drinking laws or arranging for regular power blackouts. Seriously, there are major economic impediments towards having more babies, not mentioning the social and cultural aspects. Such as the high cost of child care, school fees, etc. Are we seeing shades of Ayatollah Khomeini, who was another man to say breed for Islam and Iran during the Iran Iraq war?

Richard Grasso has gone, but Sean Harrigan of Calpers made a devastating comment:"Today we are trying to pull the pig from the trough, the next thing is to try and find out who filled the trough." A rather sad comment on the state of US financial markets. Here's a prediction, nothing will happen, perhaps the board may resign but nobody will be held accountable. Grasso walked away with his package less few millions, the board is sitting tight, John Reed has taken over and guess who is going to be left holding the can? Yes, sir, you and me both.

The 35 hour working week in France is getting its first grumbles from the general public. The French are saying that while the 35 hour working week is all fine and good for the time that they get, normal human nature has raised its ugly head. They are now moaning about the tight wages, job insecurity, wanting to get rid of this 35 hour week stating that it was useless and that it penalised French companies. Welcome back to the real world!

Another sad statistic: France's health and welfare deficit is nearly illion and projected to rise to Billion next year. The big problem for France is to find out where to acquire additional funds to cover this as well as the over all deficit, without breaking the EU mandated deficit rules.

Gold futures moved up very rapidly to reach $394.8 per ounce on the NYMEX exchange and it looks like it may well go up to the 400 level before the next month is out. With the abandonment (confused here) of the strong dollar policy over the last weekend, gold is definitely seeing major interest from almost every foreign player.

On the trade front, I am seeing an air of resignation and almost contemplation with a fair degree of CYA and the blame allocation process going strong. I expect some weeks to pass, before people's attention returns to seeing whether the current trade round can be retrieved from the mess. One thing is clear though, that the WTO has now passed the stage where it can actually provide useful guidance to the world's trading system. If the lesser developed countries want to do something about trade, they have to do it themselves. The G22 is a good starting point and they can reduce their trade barriers themselves and form a trading bloc of their own. It is useless to expect Europe, USA and Japan to resist the demands of their pampered farmers.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)

First Published: Sep 29, 2003 20:10 IST