Weak Independence Day Celebrations due to Faltering Indian Economy

India is getting ready to enjoy its 66th Independence Day August 15, it looks like to be not a moment to celebrate with its economy declining as a result of the global economic downturn and poor governance.

The economic growth worsened greatly to 5.3 % in the first quarter, which was 9.2 percent in the corresponding period last year. D. Subbarao, Governor of the Reserve Bank of India, mentioned clearly in a conversation at an event recently in Thiruvananthapuram last week that the we should concentrate more on controlling  inflation rather than aiming substantial growth. The RBI believes that decrease in interest rates would do very little to improve growth. In fact, it concludes that even more decline of the interest rate at this time, instead of encouraging growth,could worsen inflationary pressures.

Last month the RBI cut its growth prediction for this financial year (April-March) from 7.3 %to 6.5 %. This year's discouraging monsoon might negatively effect on the production, inflation and budget. The less monsoon this year will add to problems regarding inflation and sharpened economic slowdown which has been there since late last year. Farming output remains to be more crucial for India than for many other emerging economies.

Looking ahead, the RBI's more aggressive tone indicates that there is a increasing likelihood that the central bank will keep rates unaffected this year.

European Economy-What Are The Problems

European economy is facing tremendous problems. Most of the problems are created due to increase of spending sourced by borrowing. We are reproducing one good article below for the benefit of our readers.

European Economy-What Are The Problems

In this Article I am going to discuss the problems which the economies of the European countries are facing right now. Although different countries have different issues I thought there is one underlying commonness in all the problems. The major reason for the problems in European Economy is unusual growth funded entirely by borrowed funds without any corresponding rise in incomes.

I wrinkle I would make a brief growth again, as I have been watching the slip of Europe into a mess up with a feeling of watching a close circuit footage of a road accident.

Since the issues are being raised about the debts of countries like Greece, Portugal, Italy, Ireland & Spain the administrators have implemented a chain of bailouts, negotiations, strict measures & so on….but still the crisis pops back actively in haste. In all of the above cases, the troubled economies were long living on borrowed money, and that borrowed money has shaped the composition of the economies. The borrowed money was utilized for consumption, and the consumption beyond the actual income was unsustainable. As you would agree, the savings rate is directory determined by Income & consumption rates. If there is an increase in consumption without any changes in the underlying income in long run, the savings would in fact be –ve (negative).

The economic logic underlying this phenomenon is that the country’s economic growth would be entirely financed by the borrowed money which would in, short term increase consumption, employment & GDP rates. This improved statistics would again tempt the lenders to lend even more. However, the problem with the recovery plan of all the administrators seeking to save European countries from the crisis is that if we don’t have a internal growth in the underlying capacity or resources of the economy & if the inflow of borrowed money stops, the growth cycle would break & it would reverse the positive impacts it had generated on employment, consumption & GDP.

Borrowing money for consumption purpose is the main issue which is causing a drop in savings & the actual underlying growth of the countries.

Somehow, it is necessary for consumption within a crisis lands to come back into balance vis a vis creating capacity of the country.

We have seen that one of the major reasons for the problems in European countries are originated from excessive borrowings. There might be any ancillary issues which I have not covered here.

Article Source: Original Articles Directory

China's Manufacturing Growth Slows down

Stocks in Asia declined due to concerns over the growth of China as the manufacturing growth in China is less than what was anticipated for the month of May. 

 

The Purchasing Managers’ Index (PMI) fell to 53.9 from 55.7 in April. The Purchasing Managers’ Index is an indicator of economic activity. A PMI above 50 is an indicator of economic growth whereas a PMI below 50 is an indicator of reduction in economic activity.

BRIC Countries: An Overview

The term BRIC is a short form of Brazil, Russia, India & China. There is so much being discussed about BRIC countries that I thought we should take an overview of what BRIC countries signify in the world of Investments.

World economies have seen many bumps & turbulence over a recent past. That is the main reason why BRIC countries have gained importance in the eyes of world wide investors.  Reducing rates of internal economical growth, reduction in domestic demand, falling markets have created major threats to the survival of Global Investors & they are searching for new avenues for investing their funds to ensure a good return on capital & also the safety for their capital.

California Debt Unnerves Investors as Taxes Plunge $2 Billion

A $2.1 billion drop in California tax collection is opening a hole in Governor Arnold Schwarzenegger’s budget only three months after lawmakers in the most-populous state slashed spending for the second time in a year.

General fund revenue in the state accounting for 13 percent of the U.S. gross domestic product dropped to $19.4 billion during the fiscal year’s first three months, according to figures Democratic Controller John Chiang released Oct. 9. The total for the period ended Sept. 30 trailed by $1.1 billion, or 5.3 percent, forecasts in the annual budget the Republican governor signed July 28.

This reinforces that state’s budget problems aren’t over, and as the year goes on, we’re likely to see growing budget deficit projections,” said David Blair, an analyst with Pacific Investment Management Co. in Newport Beach, California, which invests $20 billion in municipal bonds. “This clearly is going to continue to put pressure on the Legislature and the governor.

The latest report underscores how states including California, the largest municipal bond issuer in the U.S., are still dealing with fallout from the recession even as the economy begins its recovery. The state last week was forced to raise yields to attract buyers to a $4.1 billion debt sale, after cutting the issue from $4.5 billion.

California’s decision helped push up borrowing costs in the municipal market by the most in almost four months even as states prepare new issues of taxable Build America Bonds, whose sales already total $40.2 billion. The Treasury pays 35 percent of interest costs for the debt, part of the federal economic stimulus plan approved in February.

 Losing Jobs

State governments are particularly hard hit by a continuing loss of jobs, which dampens the income- and sales-tax collections upon which they depend. From April through June, states and localities recorded a 12 percent tax revenue decline from a year earlier, the third consecutive quarterly drop, according to the U.S. Census. The national unemployment rate in September was 9.8 percent, the highest since 1983, according to the U.S. Labor Department.

In New York, Governor David Paterson on Oct. 6 ordered state agencies to cut spending amid predictions that the deficit for the year ending March 31 may grow to $3 billion, $900 million more than budget Officials estimated in July.

Pennsylvania, acting 101 days into the fiscal year, enacted a $27.8 billion budget on Oct. 9 that raises cigarette taxes and expands gambling to boost revenue. Ohio confronts an $844 billion gap, while Connecticut will borrow $2.25 billion over the next two years, beginning with a $1 billion debt sale in November, to balance its budget.

 ‘Somewhat Unique’

California’s problems, while somewhat unique and self- inflicted, are really America’s problems,” said Bill Gross, ‘s co-chief investment officer of the world’s biggest bond fund wrote on Oct. 1. State and federal lawmakers, unable to comprehend the extent of consumer borrowing, “reflect a lack of vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge.

The state has been among the hardest hit and its Legislature, requiring a two-thirds vote to raise taxes or pass a budget, has struggled to respond swiftly as the state’s fiscal strains worsened this year. Since February, Schwarzenegger and lawmakers have slashed $32 billion from spending, cutting into funding for schools, universities and welfare programs. They also raised taxes by $12.5 billion to balance the $85 billion budget.

Court Decision

Chiang, the controller, said the state’s latest figures show that Schwarzenegger and the Legislature must prepare for “more difficult decisions ahead.” California was as also handed a defeat on Oct. 2 by the state’s Supreme Court, which let stand a ruling that the governor and lawmakers illegally used $3.6 billion of money meant for local transportation agencies to balance the budget since 2007.

Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” Chiang said in a statement Oct. 9.While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag state revenues down.

California isn’t at immediate risk for running out of cash as it did in July, when it resorted to issuing IOUs to pay some vendors and tax refunds as lawmakers fought over how to shore up finances. Last month, it borrowed $8.8 billion by selling notes, an advance on the tax it will collect later in the budget year.

Plugging Gaps

Schwarzenegger’s administration said it’s too soon to tell whether the slide in tax receipts through September foretells a worsening trend. Should revenue continue slipping, California lawmakers may find it difficult to make up for the gaps, given how deeply they have already cut and resistance among Republicans to further tax increases.

Schwarzenegger, 62, who can’t seek re-election because of term limits, doesn’t have to present his budget for the next 12- month fiscal period until January, and he has given no indication that he is planning to call an emergency session beforehand, as he did last year.

Clearly, the numbers are cause for concern but the issue now for us is to determine if this is a one-time event or whether it has one more long-term implications,” said H.D. Palmer, a spokesman for chwarzenegger’s finance department.

The tax collection figures were released after the conclusion of a $4.1 billion bond sale, which was trimmed by about $400 million after investors demanded higher yields than the state was willing to pay on some of the securities. The sale came after a rally in demand for municipal bonds pushed state- and local-government borrowing costs to a 42-year low.

Watching for Deterioration

David Blair, the Pimco analyst, said the pullback was caused by the low yields California offered amid lingering investor concern that the state’s fiscal condition may deteriorate further.

They just got a little aggressive in where they wanted to price it, Blair said. Most people still recognize that there’s budget deficits the state is trying to deal with this year and going forward.

The difference between a 10-year California bond and a top- rated municipal security reached as much as 1.71 percentage points on July 1, when the California debt yielded 5.21 percent, according to Bloomberg data. The difference slipped to 1.06 percent on Sept. 11 before ending at 1.21 percent on Oct. 9.

Future Debt Sales
California plans to sell as much as $15 billion more in bonds this year and its deficits, while not projected to reach the $60 billion it dealt with in the two years that end in July, are persistent. The state will face a $7.4 billion gap in the fiscal year beginning on June 30 and about $15 billion in each of the following two fiscal periods, California Treasurer Bill Lockyer said in his annual report on the state’s debt, released ahead of the bond sale.

Tom Dresslar, a spokesman for the treasurer, said his office has alerted investors that the fiscal troubles are far from over and the latest tax data did little to alter the outlook.

The state has been very clear that our budget problems aren’t behind us,” Dresslar said. “This shouldn’t be a big surprise to anybody.”

(Source: Bloomberg News)

Economy in U.S. Shrank at a 0.7% Annual Rate in Second Quarter

The worst U.S. recession since the Great Depression eased more than anticipated in the second quarter, setting the stage for a recovery to take hold in the last half of 2009.The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, revised figures from the Commerce Department showed today in Washington. Gross domestic product contracted at a 6.4 percent pace in the first three months of 2009.
 

Government stimulus plans such as “cash for clunkers” and first-time home buyer credits are giving manufacturing and housing, the two areas at the center of the economic slump, a boost this quarter. Federal Reserve policy makers are among those concerned that gains in consumer spending will not be sustained as unemployment climbs and incomes stagnate.

“It’s a much better picture than a few months ago,” Lindsey Piegza, an economist at FTN Financial in New York, said before the report. “Inventories and government programs will drive growth in the second half. We’re expecting a mild recovery as the job market is still very weak.”

The drop in GDP, the sum of all goods and services produced, was less than the 1.2 percent median forecast in a Bloomberg survey of 78 economists. Estimates ranged from declines of 1 percent to 1.5 percent. The government previously calculated the pace of contraction at 1 percent last quarter.

This is the last of three estimates the government issues on economic growth.

                       Deepest Recession

The drop in GDP was the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy shrank 3.8 percent since last year’s second quarter, making this the deepest recession since the 1930s.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 0.9 percent pace last quarter, less than the government previously estimated. The median forecast of economists surveyed projected spending would be unrevised at a 1 percent drop.

Purchases are recovering this quarter. Sales at retailers surged in August by the most in three years, boosted by demand for automobiles as Americans rushed to take advantage of the “cash for clunkers” plan, figures from the Commerce Department showed earlier this month.

A smaller decline in business investment on equipment and software than previously estimated also contributed to the improved reading on GDP, the report said. Such spending fell at a 4.9 percent annual pace, compared with the 8.4 percent decline announced last month.

                       Inventories Plunge

Today’s report showed the record drop in stockpiles in the second quarter was even larger than previously estimated, paving the way for gains in manufacturing in the second half of the year. Automakers General Motors Co. and Ford Motor Co. are among firms boosting production in coming months.

Government spending climbed at a 6.7 percent pace last quarter, more than previously estimated and the biggest gain in more than seven years. The Obama administration’s $787 billion stimulus plan means such expenditures will keep rising in coming quarters.

The Fed’s preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 2 percent annual rate, the same as the government previously estimated and matching economists’ forecasts.
Fed policy makers last week said they would keep the benchmark lending rate near zero “for an extended period,” and noted that household spending, while showing signs of stabilizing, was still being constrained by “job losses, sluggish income growth, lower housing wealth, and tight credit.”


                        ‘Slow’ Recovery

The economic recovery is “slow but certain,” FedEx Corp. Chief Executive Officer Fred Smith said this week, adding he has “guarded confidence” about an improving global outlook.“Recovery is not a straight line up, but a zig-zag with a few steps forward and backward,” Smith, the founder of the second-largest U.S. package-shipping company, said at FedEx’s annual meeting in its hometown of Memphis, Tennessee.

The drag from residential construction, which subtracted 0.7 percentage point from growth last quarter, is dissipating, economists said. Sales of new homes rose in August to the highest level in almost a year, and a report yesterday from S&P/Case-Shiller showed house values in 20 cities climbed in July from the prior month by the most since 2005.
 

The economy will expand at an average 2.6 percent pace in the second half of the year, according to the median estimate of economists surveyed by Bloomberg earlier this month.

The jobs report in two days may show payrolls declined by 180,000 in September after a 216,000 drop the prior month, and the unemployment rate climbed to 9.8 percent from 9.7 percent,the survey median shows. Economists surveyed by Bloomberg predict unemployment may reach 10 percent by year-end, the highest level since 1983.

Finally, today’s report showed corporate profits climbed 3.7 percent in the second quarter, the second consecutive gain. 

(Source: Bloomberg News)

World Economy: Nobel Winner Krugman Says -End of World Postponed

The global economic downturn has probably hit bottom though the recovery will be “slow and painful,” said Paul Krugman, the Nobel Prize winning economist.

“The end of the world appears to have been postponed,” 

Krugman, a professor at Princeton University, said at a seminar in Helsinki today. The world economy “does not appear to be falling into an abyss but is still” in trouble.

The outlook is “very fuzzy’ and a W-shaped recovery may become U-shaped.Germany, France and Japan emerged from recession last Quarter, adding to evidence some of the world’s biggest Economies are over the worst. The U.S. recession probably endedin late July or August, Krugman said, after gross domesticProduct fell 1 percent in the second quarter from the prior

three months.

The Nobel Laureate said ‘‘the truly extraordinary thing”has been “the collapse of world trade,” the subject for whichhe was awarded the prize last year, and he cast doubt on the potential for exports to lead the global recovery. He also said China’s economy isn’t big enough to serve as a growth engine.

“The problem is that this is a global financial crisis,”he said. “How can we have an export-led recovery unless we find another planet to export to?”

                          No Locomotive

 Krugman questioned whether China’s economy is large enough to be a locomotive of recovery.

“One of the reasons it’s so difficult to tell a story about a fast recovery is the large surpluses in Asia,” he said.

“If they can find a serious increase in consumer demand, that would help. We don’t really understand why the Chinese savings rate is so high, but it’s probably due to” large precautionary savings.

He warned that any decision by China to diversify its Currency reserves away from the dollar would “hurt Europe and Japan the most.”

While budget deficits “saved the world” in the short term, “for most people things are going to get worse,” he
said. “Governments can help us cope with the crisis, but they have levels of debt that are sufficiently high to be a source of concern.”

Even so, the recovery remains too frail to warrant scaling back support measures, he said. “Exit from stimulus should certainly wait until we have clear signs that we’re closing the output gap. This is no time to start exiting stimulus.”

                          ‘Don’t Panic’

Economies can “suffer” more than necessary if governments introduce austerity measures prematurely, Krugman said.

“Obviously deficits are building up, but to respond with severe cuts increases the human and the economic cost right away. You do not want to inflict upon yourself the equivalent of an IMF program. You want to avoid doing that if you can. You have to keep an eye on the debt numbers but not panic over them
if you can avoid it.”

While, last quarter’s drop in U.S. GDP was the fourth in a row, the longest contraction since quarterly records began in 1947, Krugman said the U.S. has $1.1 trillion in annual capacity “staying idle.” T he U.S. consumer “that’s been such an important driver of the global economy, is exhausted,” he said, forecasting U.S. unemployment may rise until early 2011.

                        Reason to Invest

 Leading the recovery will be business investment, he said, “but what’s going to drive business investment? It would be very helpful if someone could” make a discovery that would lead us out of this recession. “If we can introduce effective climate change policies, particularly the cost of carbon emissions,” that “would be a reason to invest.”

A “good” agreement at the forthcoming international climate change summit in Denmark “wouldn’t just be good for the planet, it would be good for the recovery,” Krugman said.The crisis has hurt the euro in its ‘competition’ with the dollar, he said. “The international role of the euro is that it has suffered a setback. The crisis has not been good for the euro and its competition with the dollar as the international
reserve currency.”
Krugman said he was concerned global efforts to emerge from the crisis “could just drag on and on for a long, long time.”

“The consequences of that are that you start to have problems with financing the debt and you start to have social and political problems,” he said. My great concern is that this just drags on and on with severe consequences for political and social stability.’’

History is no guide to a path to recovery, he said. “The trouble is, we really have no road maps. The only
model is the Great Depression itself.” That “was ended by a very large spending program known as World War II and we don’t Really want to repeat that.”
(source: Bloomberg News)

U.S. economy still wobbly; France, Germany show Growth

Fresh data on Thursday dented hopes the U.S. economy is on the verge of a strong rebound, even as Western Europe's two largest economies reported a surprising return to growth in the second quarter.

Many pundits had expected the United States to lead the global economy out of recession, but the world's largest economy was soundly beaten to the punch as its retail sector struggled to lure skittish consumers.

Massive job losses and sharp declines in the housing market have prompted many Americans to pare back spending.

U.S. households are "in no position to drive a decent economic recovery," said Paul Dales, economist at Capital Economics in Toronto.

An unexpected rise in second-quarter GDP in Germany and France, pillars of the euro zone economy, boosted financial markets, which are still fretting over the potential for a global economic pickup.

German Economy Minister Karl-Theodor zu Guttenberg was cautious about the figures. Europe's recovery will likely be patchy at best, with Britain, Italy and the Netherlands still weak and parts of eastern Europe, which rely heavily on exporting to the wealthier western nations, reporting a far gloomier outlook.

GDP in the euro zone fell in the second quarter, albeit by a marginal 0.1 percent.
Germany and France emerged from lengthy recessions in April-June, with their gross domestic product rising 0.3 percent quarter-on-quarter [ID:nLD331672]. The much smaller Portuguese and Greek economies matched that growth.

The country's jobless rate fell in July for the first time in nine months.
We're entering a phase of stabilization and slow growth," Christian Dreger at the DIW Institute. "The main risk for Germany is a sharp rise in unemployment."

U.S. CONSUMERS NOT SPENDING

Retail sales excluding automobiles and gasoline, a popular measure with analysts, fell by 0.4 percent. Headline retail sales fell by only 0.1 percent as the government's "cash for clunkers" auto subsidy program drove more traffic to car dealerships. But new car sales may have drawn demand from other parts of the retail universe.

"While vehicle sales have rebounded, core retail sales have floundered after severe declines in late 2008," said Steven Wieting, economist at Citigroup.

The latest reading on continued claims, or those staying on the unemployment rolls, fell to 6.2 million from 6.3 million, a decline that suggested more long-term unemployed workers are exhausting their benefits.

Taken together, the data dulled hopes for a consumer-led U.S. recovery are elusive. Following a two-day policy meeting it said the economy is "leveling out," the first time in a year that its post-meeting guidance did not characterize the economy as contracting, weakening, or slowing.

WAL-MART EARNINGS BEAT STREET, DESPITE SOFT SALES

Wal-Mart Stores Inc. the world's largest retailer, reported on Thursday unexpectedly better earnings, but it warned that the economy remained a challenge.
The key metric for the giant discounter -- sales at stores open at least a year -- unexpectedly fell by 1.2 percent. Wall Street had looked for a gain of 0.85 percent.

Wal-Mart has benefited from "trade-down" from pricier retail chains, as many American consumers attempt to save cash, especially on staple items such as groceries and household products. Department store operator Kohl's Corp gave a grim outlook for the rest of the year, looking for same-store sales at its 1,000-plus outlets to fall as much as 5 percent.

STOCKS, EURO, INDUSTRIAL METALS RISE

Stocks, commodities and the euro rose due to the GDP surprise, while the dollar dipped. World stocks as measured by MSCI were up 1.1 percent, with U.S. markets rising despite the soft economic data. Wal-Mart surged by 2.8 percent to a four-month high.
Major U.S. stock indices are bumping their 2009 highs. Paulson's disclosure late on Wednesday that he bought large stakes in several banks, including Bank of America Corp., lifted financial stocks and helped sustain the rally.
Paulson of the eponymous Paulson & Co is credited for anticipating the looming credit crisis in 2007.

Meanwhile, copper led advances among industrial metals, reaching a 10-month high of $6,450 a ton on the London Metal Exchange. Lead, zinc and aluminum prices also rose.
"The German numbers are very helpful, the French numbers are very helpful, and that's supporting the copper market," said Sterling Smith, analyst for Country Hedging in Inner Grove Heights, Minnesota.

Budget 2009:Highlights

Pranab Mukherjee quoted Mahatma Gandhi in his speech.Democracy is the art and science of mobilizing the entire physical, economic and spiritual resources of various sections of the people in the service of the common good of
all.

BUDGET 2009-10 CHALLENGES

1. to lead economy to high GDP growth rate of 9 per cent per annum at the earliest
2. to deepen and broaden the agenda for inclusive development to improve delivery mechanisms of the government.
3. to lead economy to high GDP growth rate of 9 per cent per annum at the earliest

BUDGET HIGHLIGHTS

• to deepen and broaden the agenda for inclusive development to improve delivery mechanisms of the government.
• Govt unlikely to unveil any significant economic reform plans
• Agriculture sector may get a boost
• Big investments in irrigation and seeds may be on the anvil
• Government may ease export curbs on wheat and rice
• Fiscal deficit was projected to be 5.5% of GDP in Interim Budget
• This is Pranab Mukherjee's fourth Union Budget
• Economic growth slipped from 9% to 6.7% in 2008-09
• Gross budgetary support in the range of Rs 3,35,000 cr
• Govt to raise borrowing target to tackle budget deficit
• Fiscal sops likely for slowdown-hit sectors
• Govt may announce auctioning 3-G spectrum
• FM to announce PSU disinvestment plans
• PSU sell-off to help fund rural and social programmes.
• Infrastructure sector likely to get attention
• I am deeply aware of the youth's challenges
• I am conscious of people's faith in UPA
• FM Pranab Mukherjee begins his Budget speech
• Cabinet approves Union Budget
• High expectations for reformist Budget from the UPA
• Budget to carry forward NREGA and JNNURM
• Fringe Benefit Tax may be scrapped
• Securities Transaction Tax may be reduced
• Challenge before UPA to return to 9% growth
• Re-energise government and reinstitutionalise development
• One Budget can't solve all issues
• Improve rule of law for all citizens
• Mandate for inclusive growth
• Strengthen the delivery mechanism for healthcare
• Increase investment in infrastructure
• I am deeply aware of the youth's challenges
• New company IIFCL to look at infrastructure needs
• Two worst quarters since September slowdown behind us
• Signs of revival in the domestic industry
• Fiscal stimulus gave economy a boost
• Govt took 3 stimulus packages to fight slowdown
• Economic growth is a synergy of states and Centre
• Integration of Indian economy with rest of the world
• Significant hike in foreign capital
• Housing allocation hiked under Rajiv Awaas Yojana
• Fund allocation for urban poor accommodation is 3,973,000 cr
• JNNURM allocation hiked by 87 per cent
• NHAI allocation up by 23 per cent
• Hike infrastructure investment to over 9% of GDP by 2014
• IIFCL will refinance 60% of commercial bank loans in PPP
• IIFCL will look at new projects
• IIFCL will also look at incremental lending by banks
• Print media stimulus package extended by six months
• Target for agriculture credit raised to Rs 3,25,000 cr in 2009-10
• FIIs have returned to India in last few months
• Storm-water drainage project fund hiked to Rs 500 cr
• Blueprint for national gas grid
• Additional budget allocation to farmers
• Allocation of Rashtriya Krishi Vikas Yojna stepped up by 30%
• Total fiscal stimulus during '08-09 is Rs 1,86,000 cr
• Move towards energy security via Integrated Energy Act
• Saral-II forms to simplify taxation process
• An expert panel will look into petroleum product pricing
• Domestic oil prices must be in sync with global prices
• Fertiliser subsidy to go directly to farmers
• Export Credit Guarantee scheme extended till March 2010
• Pranab Mukherjee quotes Kautilya in Budget speech
• Incentives in interest rates to farmers to pay back
• Allocation for PM Gram Sadak Yojna up by 59 per cent
• Rs 39,100 crore allocation for NREGA
• NREGA gave employment opportunities to more than 4.47 cr households
• Aam Aadmi is the focus of all UPA's schemes
• Govt to shift to nutrient based fertiliser subsidy regime
• Banking network to be expanded
• One banking centre in every bloc
• Banks, insurance to stay with Govt
• Interest subsidy on education loans
• Rashtriya Mahila Kosh corpus to be raised to Rs 500 crore
• Rs 2,000 cr for rural housing fund under National Housing Bank
• National Mission for female literacy
• NREGA allocation up 144%
• Work on National Food Security scheme for subsidised food
• Rs 100 cr one-time grant to expand banks in unbanking areas
• Indira Awaas Yojna hiked by 63% to Rs 8,883 cr
• Unique Identification ID project to roll out in 12-18 months
• Unique Identification ID project to tap private talent
• Allocation for NRHM to be raised by Rs 257 cr
• National action plan on climate change
• Full interest subsidy for students in approved institutions
• Modernisation of national employment exchanges
• 50% cent of rural women in self-help groups
• Rural mega clusters in Bengal and Rajasthan
• Rs 25 cr each for AMU campuses in Murshidabad and Mallapuram
• Rs 2,113 cr for IITs and NITs
• Pension of non-commissioned officers to be hiked
• Commonwealth allocation hiked to Rs 16,300 cr
• Allocation of Rs 50 cr to Chandigarh University
• Rs 50 crore allocation for Punjab University
• Govt to hike allocation to National Ganga Project to Rs 562 cr
• One rank, one pension for ex-servicemen from July 1
• Allowances to para-military forces at par with defence forces
• Rs 1,000 cr for Aila rehabilitation programme to West Bengal
• New pension benefits for 12 lakh jawans and JCOs
• Allocation for rehab of Lankan Tamils
• Higher public investment in infrastructure
• Defence outlay has gone up
• Recent initiative, on direct taxes side, of the setting up of a Centralized Processing Centre (CPC) at Bengaluru where all electronically filed returns, and paper returns filed in entire Karnataka, will be processed.
• National pension scheme exempt from STT
• Political funding to get 100 per cent tax deductions.
• Deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability being raised from the present limit of Rs.75,000 to Rs.1 lakh.
• Sun-set clauses for deduction in respect of export profits under sections 10A and 10B of the Income-tax Act being extended by one more year i.e. for the financial year 2010-11.
• Exemption limit in personal income tax raised by Rs.10,000 from Rs.1.50 lakh to Rs.1.60 lakh for all other categories of individual taxpayers.
• Total budget expenditure for 2009-10 will Rs 10,28,032 cr
• Share of direct taxes has increased to 56 per cent in 2008-09
• GST to come into effect from April 01, 2010
• Corporate tax unchanged
• New tax code to be set up in 45 days
• Goods and Services Tax to be introduced from April 1, 2010
• Govt committed to tax reforms
• Anonymous funds to charitable bodies get some tax relief
• Commodities Transaction Tax to be abolished
• MAT hiked to 15% of book profit
• Fringe Benefit Tax to be scrapped
• Surcharge on personal Income tax slashed by 10%
• Hike in IT exemption for women to Rs 1,90,000
• Hike in IT exemption to Rs 2,40,000 for senior citizens
• General Sales Tax model will have a Central GST and State GST
• Branded jewellery for women to become cheaper
• Sensex crashes 869 Points
  
• Customs duty on bio-diesel reduced
• Tax holiday extended for textile units
• Small businesses exempt from advance tax
• Custom duty on LCD panels halved
• Set-top boxes to cost more
• Anonymous funds to charitable bodies to get some tax relief
• Excise duty on fibre for cheaper cloth reduced
• Service tax to be levied on law firms
• Excise duty on petrol-driven small trucks reduced to 10%
• Exemption of duty on goods made at construction sites restored
• Drugs for heart diseases to become cheaper
• Customs duty on gold and silver import increased
• Mobile phone accessories to become cheaper
• Pranab Mukherjee ends Budget speech by quoting the Mahatma Gandhi
  

Buffett Warnings on Investment 'Time Bomb'

Derivatives are financial weapons of mass destruction

Warren Buffett

The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", legendary investor Warren Buffett has warned.
The world's second-richest man made the comments in his famous and plain-spoken "annual letter to shareholders", excerpts of which have been published by Fortune magazine.
The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.
But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.
Contracts devised by 'madmen'
Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment.
Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years

Warren Buffett
Derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets - in effect buy insurance against market movements -, but have quickly become a means of investment in their own right.
Outstanding derivatives contracts - excluding those traded on exchanges such as the International Petroleum Exchange - are worth close to $85 trillion, according to the International Swaps and Derivatives Association.
Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen".
He warns that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998.



Derivatives are like 'hell'
Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systemic problems

Warren Buffett
Derivatives also pose a dangerous incentive for false accounting, Mr Buffett says.
The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later.
This can result in nasty accounting errors. Some of them spring from "honest" optimism. But others are the result of "huge-scale fraud", and Mr Buffett points to the US energy market, which relied for most of its deals on derivatives trading and resulted in the collapse of Enron.
Berkshire Hathaway, the investment group led by Mr Buffett, is pulling out of the market, closing down the derivatives trading subsidiary it bought as part of a huge reinsurance company a few years ago.
In his letter Mr Buffett compares the derivatives business to "hell... easy to enter and almost impossible to exit", and predicts that it will take years to unwind the complex deals struck by its subsidiary General Re Securities.
Warren Buffett, dubbed "the sage of Omaha", from where he controls Berkshire Hathaway, is well-known for both his blunt assessments of the markets and the high returns he delivers to shareholders.
This year, he remains cool towards further share investments, despite the sharp correction in stock market values. Mr Buffett says this "dismal fact is testimony to the insanity of valuations reached during The Great Bubble".
Berkshire backyard barbecues
A good friend of Bill Gates, he famously refused to invest in technology shares during the boom years that came to a sudden end in March 2000. As a result, Berkshire was sitting pretty after the technology bubble burst.
In marked contrast to the hubris of former managers at fallen firms like Enron and WorldCom, Mr Buffett is known for his down-to-earth style, summoning shareholders not to glitzy hotels but "Berkshire backyard barbecues" and baseball games in out-of-the-way Omaha, Nebraska.
But his strategy of identifying undervalued companies with good management in unfashionable retail sectors or the insurance industry and investing in them for the long-term has produced spectacular returns.
During the past 37 years, the company has delivered an average annual return of 22.6%. Since 1965 the company's book value has gone up by 194,936%.
However in 2001, the last year for which detailed numbers are available, heavy losses in the insurance industry worldwide resulted in a $3.77bn loss at Berkshire Hathaway - the first loss in the firm's history under Warren Buffett.

Barack Obama's Speech on 21st Century Financial Regulatory Reform

Speaker: Barack Obama

President Obama gave these remarks on financial regulatory reform on June 17, 2009.

THE PRESIDENT: Thank you very much.

Since taking office, my administration has mounted what I think has to be acknowledged as an extraordinary response to a historic economic crisis. But even as we take decisive action to repair the damage to our economy, we're working hard to build a new foundation for sustained economic growth. This will not be easy. We know that this recession is not the result of one failure, but of many. And many of the toughest challenges we face are the product of a cascade of mistakes and missed opportunities which took place over the course of decades.

That's why, as part of this new foundation, we're seeking to build an energy economy that creates new jobs and new businesses to free us from our dependence on foreign oil. We want to foster an education system that instills in each generation the capacity to turn ideas into innovations, and innovations into industries and jobs. And as I discussed on Monday at the American Medical Association, we want to reform our health care system so that we can remain healthy and competitive.

This new foundation also requires strong, vibrant financial markets, operating under transparent, fairly-administered rules of the road that protect America's consumers and our economy from the devastating breakdown that we've witnessed in recent years.

It is an indisputable fact that one of the most significant contributors to our economic downturn was a unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis -- the Great Depression -- was overwhelmed by the speed, scope, and sophistication of a 21st century global economy.

In recent years, financial innovators, seeking an edge in the marketplace, produced a huge variety of new and complex financial instruments. And these products, such as asset-based securities, were designed to spread risk, but unfortunately ended up concentrating risk. Loans were sold to banks, banks packaged these loans into securities, investors bought these securities often with little insight into the risks to which they were exposed. And it was easy money -- while it lasted. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting the responsibilities.

Meanwhile, executive compensation -- unmoored from long-term performance or even reality -- rewarded recklessness rather than responsibility. And this wasn't just the failure of individuals; this was a failure of the entire system. The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction.

An absence of oversight engendered systematic, and systemic, abuse. Instead of reducing risk, the markets actually magnified risks that were being taken by ordinary families and large firms alike. There was far too much debt and not nearly enough capital in the system. And a growing economy bred complacency.

Now, we all know the result: the bursting of a debt-based bubble; the failure of several of the world's largest financial institutions; the sudden decline in available credit; the deterioration of the economy; the unprecedented intervention of the federal government to stabilize the financial markets and prevent a wider collapse; and most importantly, the terrible pain in the lives of ordinary Americans. And there are retirees who've lost much of their life savings, families devastated by job losses, small businesses forced to shut their doors.

Millions of Americans who've worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure.

So the question is, what do we do now? We did not choose how this crisis began, but we do have a choice in the legacy this crisis leaves behind. So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.

These proposals reflect intensive consultation with leaders in Congress, including those who are here today: Chairman Dodd and Chairman Frank, who, along with Senator Shelby and Representative Bachus, will be meeting with me throughout this process. They met with me earlier this year to jumpstart the discussion of reform. These reforms are also drawing on conversations with regulators, including those I met with this morning, as well as consumer advocates and business leaders, academic experts, and the broader public.

In these efforts, we seek a careful balance. I've always been a strong believer in the power of the free market. It has been and will remain the engine of America's progress -- the source of prosperity that's unrivaled in history. I believe that jobs are best created not by government, but by businesses and entrepreneurs who are willing to take a risk on a good idea. I believe that our role is not to disparage wealth, but to expand its reach; not to stifle the market, but to strengthen its ability to unleash the creativity and innovation that still make this nation the envy of the world.

That's our goal -- to restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed; in which honest, vigorous competition is the system -- in the system is prized, and those who game the system are thwarted.

With the reforms we're proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly, without the fragility in which normal business cycles suddenly bring the risk of financial collapse; we want a system that works for businesses and consumers.

There are those who will say that we do not go far enough, that we should have scrapped the system altogether and started all over again. I think that would be a mistake. Instead, we've crafted reforms to pinpoint the structural weaknesses that allowed for this crisis and to make sure that these problems are dealt with so that we're preventing crises in the future.

There are also those who say that we are going too far. But the events of the past few years offer ample testimony for the need to make significant changes. The absence of a working regulatory regime over many parts of the financial system -- and over the system as a whole -- led us to near catastrophe. We shouldn't forget that. We don't want to stifle innovation. But I'm convinced that by setting out clear rules of the road and ensuring transparency and fair dealing, we will actually promote a more vibrant market. This principle is at the heart of the changes we're proposing, so let me list them for you.

First, we're proposing a set of reforms to require regulators to look not only at the safety and soundness of individual institutions, but also -- for the first time -- at the stability of the financial system as a whole.

One of the reasons this crisis could take place is that while many agencies and regulators were responsible for overseeing individual financial firms and their subsidiaries, no one was responsible for protecting the whole system from the kinds of risks that tied these firms to one another. Regulators were charged with seeing the trees, but not the forest. And even then, some firms that posed a so-called "systemic risk" were not regulated as strongly as others; they behaved like banks but chose to be regulated as insurance companies, or investment firms, or other entities that were under less scrutiny.

As a result, the failure of one firm threatened the viability of many others. The effect multiplied. There was no system in place that was prepared for this kind of outcome. And more importantly, no one has been charged with preventing it. We were facing one of the largest financial crises in history -- and those responsible for oversight were mostly caught off guard and without the authority needed to address the problem.

It's time for that to change. I am proposing that the Federal Reserve be granted new authority -- and accountability -- for regulating bank holding companies and other large firms that pose a risk to the entire economy in the event of failure. We'll also raise the standard to which these kinds of firms are held. If you can pose a great risk, that means you have a great responsibility. We will require these firms to meet stronger capital and liquidity requirements so that they're more resilient and less likely to fail.

And even as we place the authority to regulate these large firms in the hands of the Federal Reserve -- so that lines of responsibility and accountability are clear -- we will also create an oversight council to bring together regulators from across markets to coordinate and share information, to identify gaps in regulation, and to tackle issues that don't fit neatly into an organizational chart. We're going to bring everyone together to take a broader view -- and a longer view -- to solve problems in oversight before they can become crises.

As part of this effort we're proposing the creation of what's called "resolution authority" for large and interconnected financial firms so that we're not only putting in place safeguards to prevent the failure of these firms, but also a set of orderly procedures that will allow us to protect the economy if such a firm does in fact go underwater.

Think about this: If a bank fails, we have a process through the FDIC that protects depositors and maintains confidence in the banking system. This process was created during the Great Depression when the failure of one bank led to runs on other banks, which in turn threatened wider turmoil. And it works. Yet we don't have any effective system in place to contain the failure of an AIG, or the largest and most interconnected financial firms in our country.

And that's why, when this crisis began, crucial decisions about what would happen to some of the world's biggest companies -- companies employing tens of thousands of people and holding trillions of dollars in assets -- took place in emergency meetings in the middle of the night. And that's why we've had to rely on taxpayer dollars. We should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution, or to support the company with taxpayer money. That's an unacceptable choice. There's too much at stake, and we're going to change it.

Second, we're proposing a new and powerful agency charged with just one job: looking out for ordinary consumers. And this is essential, for this crisis was not just the result of decisions made by the mightiest of financial firms; it was also the result of decisions made by ordinary Americans to open credit cards and take out home loans and take on other financial obligations. We know that there were many who took out loans they knew they couldn't afford, but there were also millions of Americans who signed contracts they didn't always understand offered by lenders who didn't always tell the truth. Even today, folks sign up for mortgages or student loans or credit cards and face a bewildering array of incomprehensible options. Companies compete not by offering better products, but more complicated ones, with more fine print and more hidden terms.

So this new agency will change that, building on credit card reforms I signed into law a few weeks ago with the help of many of the members of Congress who are here today. This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want -- and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You'll be able to compare products and see what's best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out -- those things will be a thing of the past. And enforcement will be the rule, not the exception.

For example, this agency will be empowered to set new rules for home mortgage lending, so that the bad practices that led to the home mortgage crisis will be stamped out. Mortgage brokers will be held to higher standards. Exotic mortgages that hide exploding costs will no longer be the norm. Home mortgage disclosures will be reasonable, clearly written, and concise. And we're going to level the playing field so that non-banks that offer home loans are held to the same standards as banks that offer similar services, so that lenders aren't competing to lower standards, but rather are competing to meet a higher bar on behalf of consumers.

The mission of this new agency must also be reflected in the work we do throughout the government. There are other agencies, like the Federal Trade Commission, charged with protecting consumers, and we must ensure that those agencies have the resources and the state-of-the-art tools to stop unfair and deceptive practices as well.

Third, we're proposing a series of changes designed to promote free and fair markets by closing gaps and overlaps in our regulatory system -- including gaps that exist not just within but between nations.

We've seen that structural deficiencies allow some companies to shop for the regulator of their choice -- and others, like hedge funds, to operate outside of the regulatory system altogether. We've seen the development of financial instruments, like many derivatives, that are so complex as to defy efforts to assess their actual value. And we've seen a system that allowed lenders to profit by providing loans to borrowers who would never repay, because the lender offloaded the loan and the consequences to somebody else.

And that's why, as part of these reforms, we will dismantle the Office of Thrift Supervision and close loopholes that have allowed important institutions to cherry-pick among banking rules. We will offer only one federal banking charter, regulated by a strengthened federal supervisor. We'll raise capital requirements for all depository institutions. Hedge fund advisors will be required to register with the SEC.

We're also proposing comprehensive regulation of credit default swaps and other derivatives that have threatened the entire financial system. And we will require the originator of a loan to retain an economic interest in that loan, so that the lender -- and not just the holder of a security, for example -- has an interest in ensuring that a loan is actually paid back. By setting common-sense rules, these kinds of financial instruments can play a constructive, rather than destructive role.

Over the past two decades, we've seen time and again, cycles of precipitous booms and busts. In each case, millions of people have had their lives profoundly disrupted by developments in the financial system, most severely in our recent crisis. These aren't just numbers on a ledger. This is a child's chance to get an education. This is a family's ability to pay their bills or stay in their homes. This is the right of our seniors to retire with dignity and security and respect. These are American dreams, and we should not accept a system that consistently puts them in danger.

Financial institutions have an obligation to themselves and to the public to manage risks carefully. And as President, I have a responsibility to ensure that our financial system works for the economy as a whole.

There's always been a tension between those who place their faith in the invisible hand of the marketplace and those who place more trust in the guiding hand of the government -- and that tension isn't a bad thing. It gives rise to healthy debates and creates a dynamism that makes it possible for us to adapt and grow. For we know that markets are not an unalloyed force for either good or for ill. In many ways, our financial system reflects us. In the aggregate of countless independent decisions, we see the potential for creativity -- and the potential for abuse. We see the capacity for innovations that make our economy stronger -- and for innovations that exploit our economy's weaknesses.

We are called upon to put in place those reforms that allow our best qualities to flourish -- while keeping those worst traits in check. We're called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our actions.

This is a difficult time for our nation. But from this period of challenge, we can once again tap those values and ideals that have allowed us to lead the global economy, and will allow us to lead once again. That's how we'll help more Americans live their own dreams. That's why these reforms are so important. And I look forward to working with leaders in Congress and all of you to see these proposals put to work so that we can overcome this crisis and build a lasting foundation for prosperity.

Thank you very much, everybody. Thank you. (Applause.)

Why the U.S. Should Encourage FDI

Last year, foreign investors set new records for their acquisition activity in the United States. And 2008 began with nearly daily stories of American financial executives courting foreign direct investors, particularly sovereign wealth funds, for new investments. Calls for increased oversight of such investments have already begun to percolate. Are these concerns warranted? If history is any guide, foreign investors in the United States have more to worry about than domestic regulators do. The singular fact about foreign direct investors in the United States is just how unsuccessful they are. They appear to systematically earn low returns on their investments in American corporate assets.

"The singular fact about foreign direct investors in the United States is just how unsuccessful they are."

The returns on American inbound foreign direct investment (FDI) are highly distinctive for two reasons. First, they are systematically lower than the returns of American outbound FDI. By way of example, the data indicate that GE earns a much higher return on overseas activities than Siemens does in the United States. Indeed, over the last 25 years, the accounting rate of return on inbound FDI to the United States has averaged 4.3 percent while the average for outbound FDI from the United States has been 12.1 percent.

Second, this remarkable return differential doesn't reflect a more general differential in investment returns. During this same period, the equity markets in the United States outperformed the rest of the world in the majority of years. As such, there is something particularly bad about the return experience of foreign investors taking a controlling position in American companies. In short, America is a beautiful country for stock portfolio investors and a very difficult one for direct investors.

Tilted playing field

Why is it so difficult to make money as a direct investor in the United States? Indeed, much of the rhetoric on investing environments argues that the major destinations for U.S. outbound FDI—the developed markets of Europe and Japan and the emerging markets of China and India—are filled with capital controls and ownership restrictions. How can the United States as a destination end up being so much less attractive despite the relative absence of this usual litany of investment obstacles?

Part of the answer may lie precisely in how these obstacles tilt the playing field between local firms and multinational firms. In a series of papers, [HBS associate professor] C. Fritz Foley, [University of Michigan professor] James R. Hines Jr., and I have shown that distorted environments are precisely where multinational firms have an advantage relative to local firms. In countries with weak capital markets and burdensome regulatory regimes, multinational firms can use their internal capital and product markets to access global resources while local firms can't. In effect, these distorted environments burden local firms, create opportunities for institutional arbitrage for multinational firms, and can lead to a successful set of foreign activities for multinational firms.

The United States, in contrast, creates few such opportunities for low-hanging fruit for foreign multinational firms relative to local firms. As such, the conditions that may underpin the profitable experience of U.S. firms as they expand abroad are not there for foreign firms investing in the United States. More generally, the presence of highly competitive local firms in the United States undercuts efforts by foreign multinationals that don't have truly differentiated capabilities. Simply replicating strategies that were successful at home is likely to be insufficient in the United States.

The real lesson of this experience is that investing directly in corporate assets is a very different experience, and creates a distinct return profile, than investing as a portfolio investor. In the absence of a unique capability that is a source of value-added expertise on some dimension, making money on direct investing is very difficult. In a relatively unfettered market like the United States, the presence of such a capability is all the more important, and recent experience suggests that direct foreign investors on average do not possess that advantage when entering the United States.

For sovereign wealth funds eager to deploy capital, the experience of the last two decades of investing in the United States is a cautionary tale. While firms and countries can be tempted to think that they have a unique capability that will allow them to generate returns through direct investment, most such arguments are founded on hubris rather than on solid advantages or capabilities.

Indeed, Norway, the country with the most experience in investing national wealth, has developed an endowment model that eschews direct investments. Instead, the Norwegians have evolved into a world-class portfolio investor that predominantly makes asset allocation decisions.

For U.S. regulators, these patterns do not recommend increasing barriers to foreign investment. Indeed, America should be rolling out the welcome mat and thanking foreign direct investors for investments that appear to be, on average, transferring wealth from abroad to the United States.