Is Euro following fate of Bretton Wood’s Gold standard!

Before going to Euro, I would like to touch upon the Bretton Wood’s Gold Standard for the benefit of my readers. Bretton Wood’s gold standard came to existence from a war (2^nd world war) and ironically dissolved with a war (Vietnam War). After 2^nd world war, to build the International economic stabilization, certain countries came together to form a monetary system for trading, exchanging mutually tradable currency and etc. The main designers of this system were Briton’s Sir John Maynard Keynes and America’s Harry White. Even though Keynes had an Idea of new reserve currency called “Bancor” but that idea has been rejected by White and others, indicating people moving towards US rather than UK! So countries which came together, agreed to peg their currency to US dollar and US dollar in turn will be pegged to Gold, $35/Ounce and formed the organization called IMF (International Monetary Fund). The entire system was based on some condition for member countries like subscription quota for membership, trade deficit maintenance like balance payment issues and etc. But after some time due to macro economical cycles, certain changes in the world economy like, recovery of Europe, Cold War between US & USSR, globalization of banking/currency system, fast emergence of Japan, Vietnam War and balance of payment issue with US made the cracks in the gold system, making it to fall out in 1971, by then US president Nixon unilaterally withdrawing the pegging the Dollar to Gold. Which is popularly know as Nixon Shock!

Now coming to Euro, it came to existence in 1992 for most of the European Union countries as the member. The Euro formation was on some conditions like such as a 1. Annual government deficit: The ratio government deficit to GDP must not exceed 3%
and Government debt: The ratio of gross government debt to GDP must not exceed 60%.
2. Inflation rate: Not more than 1.5% higher than the average of the three best performing (lowest inflation) member states of the EU.
3. The interest rate must not be more than 2% higher than in the 3 lowest inflation member states.
4. Exchange rate: countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devalued its currency during the period

But at present some of the European countries don’t look to fit any of the above conditions except currency condition for example…

Country	Government Deficit to GDP forecast	Government Debt to GDP	Inflation and Interest Rate
Ireland	10%	120%	0.6% & 1%
Greece	7%	140%	5% & 1%
Italy	4.5%	120%	1.8% & 1%
Belgium	5%	100%	3% & 1%
Spain	7%	65%	2.5% & 1%
Portugal	5%	85%	2.5% & 1%

From the above table we can say all troubled European countries like Ireland, Greece, Spain, Portugal, Italy and Belgium are

àFacing government deficit to GDP is more than 3%, which is the minimum requirement condition for EURO/EU.
à Government debt to GDP required condition is less than 60%, but each country’s debt to GDP easily exceeding the prerequisite condition. And also from country perspective Debt to GDP ratios of 120% (Ireland) and 140% (Greece) are not good. We have present example of Japan’s Balance Sheet problem due to which it lost two decades of growth and witnessed lost decade.
àNow coming to Inflation and Interest rate, see the real interest rate of each country. As ECB decides the Interest rate of the region, countries with different inflation (particularly too high and too low) will be under tremendous pressure. This might push them currency devaluation/revaluation which is again restraint condition

--- will be continued...

Growth Oriented Budget

By now everybody would heard, read or made an opinion about this years Union Budget. In fact I wanted to post this on Friday night itself but as usual my laziness came in between me & my blog posting!!!

First thing which comes to my mind about this budget is "inclusive growth" concept which government is talking about from quite a few days. I think first time a Finance Minister of India coming out openly in budget speech & saying India needs to double digit growth to eradicate poverty, he is saying "nobody is going feed 120 crore people of India rather we have to feed ourselves & in excess we have to export". This vision itself is future growth oriented.

Now coming to budget details first eye catching point is Direct Taxes which is going to affect middle, higher middle class & upper class savings & expenditure pattern. The upper cap for first slab of direct tax (i.e. for 10% tax rate) raised from 3 to 5 lakh and 20% tax rate slab increased from 5 to 8 lakh. Here tax payers can save Rs. 20000 & Rs. 50000 per year with respect to 1st & 2nd slabs. This saving itself will lead to more consumption/investments & etc. And why I feel good about this is not because less tax payment but direct consumption/investment is far more effective than the government spending as we all know efficiency of bureaucracy! And in addition to that Mr. FM has extended Rs. 20000 from 1 lakh to 1.2 lakh tax deduction amount under 80c act Income tax for long term investments. Which again leads to more saings & investments. Why I stressing this savings part is because of this only India relatively less affected from this present Financial Crisis. Because if you see the roots of the crisis is US saving rate(less than 2% where as India's is 33-35%), their dependency on credit card life, kind of loans like NINJA (No Income, No Job & Asset) & some regulatory issues.

Now coming to corporate taxes, he kept base tax of 30% same but reduced surcharge from 10% to 7% & kept education cess same as 3%. Previously altogether it used to come around 33.99% but now 33.2175%. I don't find reducing surcharge is a good move particularly companies are getting back to their normal profit & bottom line targets. And I was watching Mr. Narayan Murthy, a well known Infosys Founder was saying that "there should not any tax holidays to IT companies as they are paying taxes in all over the world then why not in India". So I don't find any harm in his statement, as I believe tax holidays or anything like that is for starting up/building companies & not for well built companies. In accordance to Murthy's views Mr. FM has increased MAT (Minimum Alternative Tax, which is paid by tax holiday companies/sectors & etc) from present 15% to 18%.

Now coming to rural/agriculture in which still major part of India is living & getting livelihood. First in this NREGS which is quite a revolutionary in recent time by providing at least 100 days job in a year to villagers & particularly 75-80% of them are women with a wage of Rs. 90 to Rs. 100. NREGS got allocation of Rs. 40100 crores. This scheme brings many advantages mainly, women empowering financially, less crowding of urban areas for unskilled jobs, increase in income of village people. In fact one of the cause for present food inflation is strong demand from villagers as compared to villagers. Okay about inflation we can talk later. Mr. FM has kept the target of agriculture loan of Rs. 375000 crore for this financial target. Rs. 400 crore has been allocated to extend the green revolution to eastern parts of India like Bihar, UP, WB, Orissa & etc, due to which obviously productivity will increase. And most importantly Rs. 300 is provided to organise "60000 pulses & oil seed villages" to increase the productivity. Providing banking facility to places having more than 2000 population by 2012-13.

And most important thing from FDI & FII perspective is Fiscal Consolidation/Deficit. Financ Minister has given surprising target by beating the market expectation of pegging it to 4.8% for 2011-12 & 4.1% for 2012-13. Here government is expected raise some Rs. 35000-40000 crores from disinvestment process & substantial amount from 3G auction process.

Now most controversial but step towards the oil price deregulation is restoring the basic duty of 5% on crude petroleum; 7.5% on diesel and petrol and 10% on other refined products. Also, the central excise duty on petrol and diesel would go up by Re.1 per litre each. Almost all political parties including some parties UPA opposed & opposing this move but I dont know till when they expect government to give subsidy & run oil companies in loss?

Similarly substantial amount & concentration has other important sectors like infrastructure, power, environment & climate change, education, health & etc.

So overall I rate this budget as 8/10.

Percy Mistry's Article

Guys I wrote about the budget as a POPULIST. That exactly what Mr. Percy Mistry wrote about the Budget in today's Financial Express. Here is the piece of that article:

"Had the late Mrs Gandhi and her father made the right economic and social choices in the 1950s, 60s, and 70s instead of being seduced (owing perhaps to lack of economic nous coupled with an over-opinionated sense of their political wisdom) by the wrong ones (incubated in the failed former USSR), India’s per capita income today might arguably have been $5,000 instead of $980. Poverty would have been eradicated by 1995 rather than by 2040 at the present pace."

Highlights of the Budget

Here is a document which highlights the main points (+ve & -ves) of the budget by analyzing it sector wise like FMCG, Oil, Textile, Finance & etc.

This I got it from Geojit Financial Services Ltd.

Budget For Bharat

Yes I call it budget for BHARAT or one word which media uses frequently is "POPULIST" budget. Mr. FM started his speech by saying "A single budget speech cannot solve all the problems" in which he concentrated more towards rural areas, indicating that he would like to have domestic consumption intact which is supporting the country's economy presently.

But market reacted very sharply to this budget by declining nearly 870 points on the Sensex and 260 points on the Nifty. There various reasons for this kind of sharp decline: First is, market was expecting some policy reforms like Divestment/Disinvestment in PSUs, Decontrol in fuel prices, FDI allowances, Financial & education sector reforms & etc. Second is, due to hope, market boosted itself so much in last 2-3 months that there was some correction supposed to happen to stabilise. Third Fiscal Deficit of 6.8% which is again an hurdle to steps towards the FRBM.

At one point of time Sensex breached 14000 levels also. Sectors like Banking(-8%), reality(-7%), Consumer durables (-7%), metals (-6%) & education sector stocks like NIIT Ltd (-17%), Educomp Soln (-13%) hit very badly due to massive selling.

And one more thing I didn't like about this budget is he talked about increasing the spending various sectors' projects, but what is efficiency? As Rajiv Gandhi said only 15 paise reaches for every 1 rupee spent. This may be then but now also conditions not improved so much that we can at least 90 paise reaches for every 1 rupee spent. So what about that, reforms in distribution, reforms governments & etc.

But there are some relieving factors like increase infrastructure spending like NHAI, Indian Railway, giving more flexibility to IIFCL (India Infrastructure Finance Company Limited), more allocation of funds for Accelerated Power Development and Reform Programme (APDRP), extension of loan payment by 6 month for formers who come under loan waiver program, increasing the tax slabs by 15000 & 10000 for senior citezen & men & women respectively, Abolishing Fringe Benefit Tax (FBT) & Commodity Transaction Tax (CTT) & etc.

As Finance Minister said in his speech he has given importance to inclusive growth.
But only thing he would have given some road map for future course of action...