The Econocrat '13 [Founders]

The Econocrat

Founder’s Issue

18th October, 2013

EconocraT Founder’s Edition 2013

The Econocrat

Founder’s Issue

18th October, 2013

Contents Editorial 01 China’s Shortcomings 02 Qatar’s Economy 03 Our Real Economic Challenges 04 Oil Exploration in the Arctic National Wildlife Refuge 05 Corporate Governance and Financial Markets 06 Buying Gold: Bad for India’s Economy 08 Turkey Protests: Is EU membership a factor?

09 British India 10 Hire the Artificially Intelligent 11 Cover Story: Why China is inevitably going to overtake the US 12 FDI in Multi-brand Retail 14 US Debt Default 15 The Quiet Collapse of the Italian Economy 16 The fall of the Rupee 18 China Crisis could Pummel US Economy 19 Land Acquisition Bill 20 Welfare State 21 Why is the Euro important to Germany?

22 Editorial Board Editor-in-Chief Kunal Kanodia

Chief-of-Production Shivaan Tandon

Editors Madhav Dutt Rishabh Tusinal

Senior Editors Devesh Sahai Jai Ahuja Pulkit Agarwal Ritvik Kar

Design by Ritvik Kar

Correspondents Arnaav Bhavanani Devansh Agarwal

Master-in-Charge Mr Mohd. Istemdad Ali

Contributors Rishabh Sharma Aditya Gandhi Pranay Raj Kapoor Yash Upadhyay Amaan Kazmi Ishmaam Chowdhary Manan Pradhan Special Thanks Ms Purnima Dutta

The Econocrat

Founder’s Issue

18th October, 2013

Editorial T

he last issue of a publication is meant to be the culmination of years of commitment and dedication. For the Sc formers on the Editorial board, this issue of the Econocrat signifies the long way that we have come since 2011. The Econocrat has grown from being a four-page newsletter to having become one of the most widely read magazines on campus. As Editor-in-chief for the last two years, I am proud to have spearheaded the silent change in thinking that the Econocrat has ushered in: a publication can grow, both in quality and in number, through unwavering dedication. But this wouldn’t have been possible without Shivan’s constantly coming up with revolutionary ideas such as the Quiz or Facts sections, which have become a regular feature of the publication.

This wouldn’t have been possible without the innovative ideas that many of the board members came up with in their own capacity, in a real attempt to distinguish the Econocrat from other publications in school.

And whatever it may have become in the last two years, the Econocrat has certainly established its identity. And that is what we are proud of.

The Econocrat has now completed its fifth as a key instrument of economic debate and discussion in School. The Econocrat started off as a publication that aspired to both inform, and inculcate economic discussion among students to a scale similar to the amount of debate that we often hear on political or social issues on campus. In the course of these five years, the Econocrat has faced profound dilemmas that have both limited and severely narrowed down the scope of the role that it can effectively manage to play in a School community such as ours. In this process, board members have realized the vast scope that the field of economics, business and international trade offers and the diverging ideas that this publication must reflect.

This issue of the Econocrat is a testimony to what we have achieved over the past two years. We have the unique sections that are now regular features of the magazine: the Quiz, the Facts section and the Cartoon section. But we also have opinions and discussions that criticize, chastise, encourage and praise: from the streets of Tokyo and Abe’s economic policies, to the financial districts in Berlin, we have retained our distinctive global outlook. But we’ve also retained our commitment to explore the India angle to economics, and this is apparent in the issue.

As all good things must come to an end, so must my time as Editor-inchief. Next term there will be another voice speaking through these pages, another Editor-in-chief penning down his thoughts. But I’m glad to have made a difference to the Econocrat, and to have managed to leave my mark – however small – in a decisive time in the publication’s history.

Kunal Kanodia Editor-in-Chief

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The Econocrat

Founder’s Issue

18th October, 2013

China’s Shortcomings

Shivan Tandon

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he Chinese economy has been in the limelight for quite some time now and much deservedly so. There has been a lot of talk but no one seems to know quite for sure as to where the world’s second largest economy is headed exactly. The Economy’s growth may have slowed down but it still stands strong at a much enviable position. Economists certainly view the China with a lot of faith and assertiveness. Its huge market potential, rich labour resources, comparative advantage in labour cost and sound corporate governance are all factors that it can boast of and are bound to attract and encourage the inflow of foreign capital. However, like most other economies the Chinese economy faces certain shortcomings as well. Consumption is surely on the rise but still does not seem to meet the government stated goals.

The share of private enterprises in terms of market resources always seems to be on the lower side when compared to the state owned enterprises. Hence, there is a need to accommodate and cater to private ventures as well. However, the financial market still remains cocooned and directed by the financial authorities to quite an extent.

During the course of the last five years China had been tackling the long lasting impact global financial crisis. In order to ensure that economic growth was stable and on the rise a stimulus package to escalate domestic consumption was formulated. Now as the path seems to be less obstructive and much clearer prospects for the Chinese economy are bright and promising.

China’s economy is still expected to maintain the current growth rate of 7-8 % in the coming ten years. Given that the price index remains the same, by 2020,the GDP should amount to around 38 trillion whereas the per capita GDP should clip the mark of 26000 Yuan. In order to achieve these figures and marks a lot of effort and skill needs to be put in and utilized to the fullest capacity. The capacious production and pumping in of goods and services can further accelerate and stabilize the economy. Another factor that carries a lot of weight is the Chinese education system. The System is undergoing development and expansion at quite a rapid rate and certainly signals a bright future ahead. China, also has an edge over the other industrialized nations due to its low labour costs and abundance in human resources. China’s labour force can only be seen expanding due to the urbanization that is taking place at such a fast rate. An increase in the urban population will also lead to higher consumption levels which will in turn keep the economy moving.

The existence of a large market size along with an increase in the consumption power will most certainly create more profitable scenarios for most industries. The domestic demand for goods and services would rise and consequently create better prospects for both production and investment. Looking from a more welfare based aspect, China, despite having such a powerful and dominant position in the world has assisted developing countries such as Nigeria in order to boost their rates of economic development. When it comes to trade and investment and ties with other countries China should not be encountering any major problems.

Two aspects that require attention and to an extent some amount of implementation are taxation reforms and the need for a fair environment for private businesses. If these two areas are taken care of then the Chinese economy will be much better off and in a much more comfortable situation.

The Chinese Economy, keeping in mind its past as well as its future aims, has gathered much of the spotlight recently. As a responsible country maintaining a stable, energetic economy and an open attitude, China is making a great contribution to the world.

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The Econocrat

Founder’s Issue

18th October, 2013

Qatar’s Economy

Aditya Gandhi

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rom being one of the poorest countries in the Middle East to converting into one of the richest, Qatar’s economic ascent has few parallels. Its bountiful resources of crude oil did not preordain it, nor did it merely happen by chance. It was the successful exploitation and wise use of the natural resources for both trade and domestic purposes, which woke up this global giant. For those of us who don’t know, Qatar was a pearl fishing economy before Japan introduced their cultured pearl, which wiped out Qatar’s pearling industry in the 1930’s.

The discovery of oil eventually drove off the austere living conditions of the people and transferred Qatar to a new era of better living conditions. This was the result of increase in employment in an industry, which was generating huge profits, the oil industry. This gave huge impetus to the economy by increasing the GDP and also boosting the employment numbers.

With the discovery of the North Field: the world’s largest gas reservoir, economic conditions began to improve dramatically. Oil production and revenues increased drastically. Although it took 20 years before the full potential of the north field was found and maximized, it was certainly worth the wait. Today, Qatar has one of the highest Per Capita GDP in the world: $100,000. This is 25 times more than Qatar’s Per Capita GDP as compared to what it was in 1994.

The oil and gas sector is still the largest contributor to real GDP at 42% but it is the lowest in growth rate list expanding only at a rate of 0.8%. Oil and gas is still the backbone of Qatar’s economy, but with the help of the private sector the government seems to have developed a ‘knowledge economy’.

The government’s commitment to education can be seen by the significant financial investments with 19.6% of the government’s funds being spent on education. Due to this commitment the literacy rates are well above regional average for both male and female in the adult and youth populations.

Qatar’s infrastructure sector also seems to be gathering steam with construction booming at 11.7%. The Financial sector of Qatar seems to be progressing in leaps and bounds with the financial services growing at an annual 10.5%. Inflation has also stabilized at 3.8% in May 2013. The Banking sector is one of the fastest growing in the world with the Qatar National Bank being the largest banks in terms of assets in Middle East.

Qatar has become a role model of economic and social transformation.

With large scale investments in the economic and social sector, Qatar will, in all probability, emerge as a very strong financial market.

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The Econocrat

Founder’s Issue

18th October, 2013

Our real economic challenges T

Rishabh Sharma

he Indian economy is a hard nut to crack, and it is time that we, as our own authorities start settling on to something beyond an ‘in a nutshell’ explanation to our everlasting debates which incontrovertibly take a dramatic phase every time, leaving nothing more than an even more dramatic response to follow from the audience: the nation. Is it not counterproductive? That we being rulers of ourselves, are always in dispute with one another, most of them arising from the very immediate forum of question- answer of any government office: Speeches, whose questions are, in often cases decided beforehand by those who are supposed to be answering them. Every time a question is taken a ton of stationary to be replied, the economy suffers.

Where is the Indian economy headed? The question undoubtedly has numerous answers coming up in different languages from our country whose one very proud and unending claim of being the most culturally diverse of all has always been uprooted, regardless of any other economic turbulence. The reason why I doubt about any explanation prevailing over the other from head to tail (conclusively) in terms of pragmatism is because they are too many of them.

This also puts me in conflict about the possibility of us, as a nation ever having different bull’s eyes for our economic target, as we live it and control it collectively, within our own reaches as unit citizens.

The Corruption, becoming more and more innovative through time, has always been an appalling threat to our mixed economy, (having the third element of corruption itself in the mixture!). This is something that the everyday man is a victim to, in unquantifiable amounts, and the same man in the same amounts of possibilities, is prone to the influence that drives one helpless to perform the same tasks of corruption, possession of black money and bribes being just another forms of its prevalence. Is it not dramatic, again? Corruption is a force that can only be reckoned with nothing less than an army. India’s stance can actually be appreciative in a layman’s eyes, being one of the fastest developing economies in the world having corruption plaguing it at the same time.

Education is an immovable pile of modelled concrete when the discussion comes to the most fundamental requirements for a country to progress. Primary education being made compulsory and the fact that 96.4% of children between the ages of six to fourteen are a part of some or the other school can no longer be seen as two pillars of a considerable height, bearing the nation’s education planning system, when it comes to competition with other economies, or even to some extent our very own. In the recent Shanghai rankings of Universities, there was only one Indian University in the list of top five hundreds of them. As per the observation of the list based on correlation, the number of universities from one country on the list was found to be proportional to its share of the global gross domestic product. Going by this, there should have been ten Indian Universities on the list. This example speaks volumes about the country’s disproportionate and lopsided development schemes and, in a way, its prioritization.

Infrastructure and agriculture will always hold stance as the pivot of the economy, if it were to be considered as a circular model. The agrarian Indian economy has a diverse history of various revolutionary landmarks dating back from before Independence till now, encompassing a series of revolts and changes, major one being the green revolution. The agricultural sight, to some extent is definitely worthy of the positive comment that it has been pushing itself closer and closer to its achievable capacity; still it is our mismatch from the pacing global developments to blame for not having this vital sector equipped with latest technological advancements.

In this very extreme economy of ours (where the most expensive house in the world, 10,500 cr. Mukesh Ambani’s Antilia and the biggest slum in Asia exist side my side ), it is neither something to boast nor something to be obsessed over in any manner, that all of the country’s major cities are well connected. India remains the seventh country which finds its roots in remote areas.

There are various other factors such as the problem of conserving the environment, social discrimination, backward social institutions that have been and will likely to be for a considerable part of future, reasons that are to be pinpointed for hindrance of rational economic behaviour.

These are one of the many piles of already discovered and some yet to be discovered reasons because of which India’s economy confronts problems. They are the main ones, in front of which some of the others might even come to the verge of sounding irrelevant, but never enough to make us commit the unaffordable mistake of pushing them out of the picture as a whole!

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The Econocrat

Founder’s Issue

18th October, 2013

Oil Exploration in the Arctic National Wildlife Refuge

Pranay Raj Kapoor

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ast month, six female protesters from “Greenplace” climbed the largest skyscraper in London in agitation against the drilling of oil in the Arctic region. The protesters were later arrested, however they had successfully been able to bring in light, the environmental damage caused by drilling in the Arctic region. Over the last few decades, activity in the Arctic region has increased primarily due to the rich oil resources present in the region. However, what has captured the attention of the environmentalists in particular is the attempt to explore the Arctic National Wilderness Refugee (ANWR) in Alaska. The question of whether to open the region to oil exploration has been a long political debate. The ANWR has been an iconic refugee of wildlife since President Carter set it up in the 1980’s. Currently the region is home to approximately 250 species of animals and is a breeding ground for millions of birds. With such a large number of species at risk, the United States government must take a prudent decision of risking the environment at the cost of vital oil resources that could boost the economy.

Looking at the current energy scenario of the United States, the nation presently imports a major chunk of their oil requirements. The United States is currently the largest importer and consumer of crude oil in the world, with imports of 9 million barrels per day. The current consumption of oil in the United States is 20 million barrels per day and we see that almost 50% of the present requirements are being met by means of imports. Oil imports put a great strain on the American economy and are one of the major contributors to the trade deficit of the nation. Currently, the United States spends around $ 380 billion dollars annually on oil imports, however as demand for oil is increasing, the nation must look at methods for expanding the domestic production. The Arctic is among the few locations in the United States, which has a massive potential for recoverable oil. As per the United States Geological Survey, the 1002 area of the Arctic National Wilderness Refugee has a potential output of 10 billion barrels of recoverable oil at around $24 per barrel. It has been noted that oil output from the Arctic is sufficient to meet the entire needs of the United States for the next 18 months. At a rate of recovery of 1.5 million barrels per day, the Arctic Refugee could meet with 7.5% of United States’ oil needs for the next 20 years. At this rate, the United States could majority cut down on their imports from the Middle East by roughly 25% and reduce their vulnerability on the OPEC nations to meet with their oil needs.

Besides that, by cutting down on imports of oil, the United States could also reduce their trade deficit. Currently, one third of the nation’s trade deficit is a result of the large proportion of oil imports and by cutting down on oil imports; the current account deficit would reduce marginally. While, Alaskan oil could ease the energy scenario in the United States, it would not have a major impact on the global oil prices. This is so because as production in Alaska would increase, the OPEC nations could easily cut down on their supply and ensure that there are no major fluctuations in global oil prices.

While drilling for oil could welfare the American economy greatly, it would also have certain negative externalities of production in the form of environmental damage. Over the years, a lot of research has been done to develop a successful technology that would minimize the environmental damage. However there have been a series of failures, including the recent breakdown of one of Shell’s oilrig in the Beaufort Sea that caused a major oil spill in the region. While drilling for oil would bring economic welfare of the United States, it would put at risk the lives of millions of animals residing in the Arctic Refugee. In the past, frequent oil spills have led to the deaths of many migratory birds and animals and the question remains whether the region should be explored in the future or not. Environmentalists are sceptical about permitting the drilling of oil as it leads to global warming and oil spills leading to adverse effects on the flora and fauna in the region. The ANWR is a hub of biodiversity and currently the Obama Administration faces a challenge before them.

On one end, drilling could allow the American economy to save billions of dollars, while on the other end it would cause great environmental damage in America’s iconic refugee. With the Arctic seas of Alaska are currently closed to exploration, one does not know whether the seas would open to oil exploration in the future or not.

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The Econocrat

Founder’s Issue

18th October, 2013

Corporate Governance and Financial Markets

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f you pick up an elaborate enough, Oxford dictionary for economics and look up the word ‘corporate governance’ it will simply call it “a process, both formal and informal, through which a corporation is administered and managed.” The definition would be followed by a short explanation and the word would be deemed as understood. Well, in reality, corporate governance commands better attention, especially in the modern era of business where corporations are gigantic, and employ thousands of people who are financially able and are aware enough to speak up and act decisively as a union. The four-year long global financial crisis is evidence, unpaid and retrenched employees had created a mess for the privately run Kingfisher Airlines in India itself. Most of the grade 10 Economics students must have read that ‘human factor’ and ‘non-monetary considerations ‘ are a characteristic feature of contemporary labour as these are not the old times of rough capitalism as it existed in Britain over two centuries in the past, where the scale of over-exploitation and of breach of human rights determined the size of the profits.

In the modern scenario profitability is not enough to determine the success of a particular company or for a company to keep functioning properly. Profitability is a very short term variable and its presence does not guarantee the survival of the concerned organization. Therefore a modern business organization must have a coordinated and strong market strategy, which directly and most accurately fits into the desired image or portrayal of the organization. Thus, corporate governance in its essence is like the working model of a constitution for a corporation. Many have tried to use it to solve employee issues while most have, to fix intra board conflicts. Corporate governance is also used to deal with the stakeholders and other related entities and this is what we are majorly concerned about here. It plays a major role in determining the organizations’ credibility in the financial markets being directly linked through the organizations’ executives.

Within hours of Steve Jobs’ death, the market price of an apple share dropped by 8% to 23% in various share markets across the globe. What I’m trying to imply is not how important Steve Jobs was for apple, rather how any particular aspect or part of an organization which builds its brand name influences its credibility in the financial market. More importantly this drop in the market rate sustained only for a couple of days and moderated itself automatically. This shows that this change was a mere fluctuation and was only superficial, without any deeprooted causes or consequences. This is why every company wants to build a particular brand name to cultivate loyalty from customers, various stakeholders, etc.

If we go a bit into the details, in contemporary business corporations, the main external stakeholder groups are the shareholders, debt holders, suppliers, customers, trade creditors, and the communities affected by the corporation’s activities. The major internal stakeholders are the board of directors, executives and the various employees. Modern corporations are dynamic, they undertake both formal and very effective informal measures.

Informal measures include peculiar rituals ranging from organizing late night parties for the stakeholders to a complete Olympics organized for both, the internal as well as the external stakeholder groups.

Economics is common sense to a layman but a language to an economist. Corporate governance has various important principles that economically answer why any board executive of an organization would extend his interests to the welfare of the stakeholder. Resource Dependance Theory (RDT) directly explains the mutual nature of these interests. It basically studies how external resources of organizations affect an organization’s behaviour to other organizations including it self. This theory has implications in recruitment of board members, employees, determining production strategies and many other important plans and policies. Since all organizations depend on various types of productive resources like labour, land, capital, etc. they depend on various other organizations, which hold these resources. Therefore, all organizations need to use the principle of Criticality. They need to associate with more suppliers and integrate horizontally and vertically.

Therefore the power assumed due to the possession of resources is relational, situational and potentially

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The Econocrat

Founder’s Issue

18th October, 2013

Yash Upadhyay mutual. The validity of the RDT in this place lies in the indispensable nature of financial capital. For example, not many Indian investors would have invested in ‘Westinghouse’ yet, which is a U.S. based organization. Well, Westinghouse is set to supply nuclear reactors to the imperfect nuclear market in India. The deal is yet to be closed with NPCIL (Nuclear Power Corporation of India Limited), and is expected to attract mass investments. This turn of financial capital to the joint venture will be possible only because NPCIL has integrated vertically. This deal will increase NPCIL’s credibility in the financial market.

It is corporate governance that deals with nomination of board members and other stakeholders to benefit strategic plans of action, interests and objectives.

It is uses the Agency theory to solve issues like disparities in objectives and ideologies and difference in risk-tolerating capacities. Corporate governance also needs to undertake proper allocation of resources and risk depending on market strategies derived by it. Executives often use something called a ‘Corporate Umbrella’. If for example, even though it is unlikely to happen, tomorrow Apple and Samsung (both sector leaders and arch rivals) come up with an agreement to build a smartphone combining their technology and research by constructing a new firm; the age of the firm will be utterly irrelevant and as soon as the deal is inked, the firm’s market reliability and investment security in the global financial markets would be relatively much higher than many other big players. If you take more subtle examples from history and relate, you will find that often there is an intermediary organization that formalizes the deal and comes up in a completely new avatar inherent in the nascent organization. Well, this also shows how corporate governance is food for controversial yet very profitable business politics, leading to various joint ventures, alliances, acquisitions and mergers. This is directly linked with lowering the cost of critical resources and forming monopolies.

Well, corporate governance surely is the framework that needs to be strong and far from confused. If this framework is created with the right balance of various considerations, it definitely is what leads an organization to higher profitability and balances the various Transaction costs. If it, in itself harmonizes all aspects in right amounts, it leads to a better market performance, more dividends, better money from various financial markets and above all, an absolutely enhanced credibility which opens doors to the better banks for obviously better sums of money. In all, corporate governance is the lifeline of an organization which decides its future and in many cases justifies its past, being the backbone of its present actions resolving all ideological conflicts hence securing the very existence of the organization and at the same time enhancing what it is and what it will be. Changing from every perspective that it is looked at but its effectiveness lies in how it is the scientific super-mixture of every attempt, intention, insight, action and implication.

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The Econocrat

Founder’s Issue

18th October, 2013

Buying Gold: Bad for India’s Economy?

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old has been, and continues to be, the most popular form of saving in India and as few inroads have been made into rural areas, it remains the only choice for a large part of the Indian diaspora. Largely accredited to have guarded the Indian economy against the recent economic recession that shook the west, this century old traditional investment strategy finds favour largely due to the reduced risks of losing investment and like most good things this also, comes at a price.

For one it does not add any real value to the economy as most of it in India is used in the form of jewels or is stashed up in bank lockers and for another as it is India’s second most expensive import after crude oil, accounting for 11 % of India’s trade bill.

Moreover, unlike stocks or bonds, investing money in gold slows economic growth for, rather than circulating it removes money from the economy .Hence, curtailing liquidity and with it, investment in infrastructure and other workings of the economy. Gold imports are but a drain on the Indian economy in sharp contrast to commodities like Crude oil, goods necessary for industrial

production and the consumption of which cannot be reduced. Also, another major problem faced by the Indian economy because of its high gold consumption is the increasing current account deficit. India’s gold imports are paid for by using precious foreign exchange reserves, a huge burden on India’s balance of payments. More so, in the case of a developing economy such as ours for large amounts of important industrial goods need to be imported.

Higher consumption of industrial commodities supports and promotes industrial production, goods which can in turn be exported and the revenue utilized to fund the account deficit.

Attributed to high gold imports is a major hurdle in overcoming the current account deficit, a weak rupee, perilously close to an all time low of 57.32. Having the currency at an all time low just ahead of elections does not fare well for any Government and the import duty on gold has been increased four times in the last 18 months, to that effect. Only recently was it shot up again from to 6% to 8 %, anticipating that the fall in gold

Amaan Kazmi

imports would help the government salvage enough dollars to boost the rupee.

However, considering that even during its all time high, the demand for gold only increased and that its demand has risen by three and a half times in the past 18 months it seems like a tough job. Finance Minister P Chidambaram even requested Indians to desist from buying gold, stating that, “This will show positive impact on every aspect of the Indian economy”.

Gold ETFs, or gold exchange-traded products, are units representing physical gold, which may be in paper or dematerialized form and can be traded on the exchange like a single stock of any company. This alternative way of investing in gold, first introduced in India in 2007, witnessed slow initial growth but are picking up.

So much for our new monetary systems. The ancient human fascination for gold lives on. Not letting its owners down, it has proved itself time and again to be the perfect hedge against inflation.

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The Econocrat

Founder’s Issue

18th October, 2013

Turkey Protests: Is EU membership a factor? Ishmaam Chowdhury

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assive uprisings have taken place in Turkey against the new laws stated by the Justice and Development Party (AKP), led by Turkish PM Recep Tayyip Erdoğan, who has been re-elected for the third time, winning the 2002, the 2007 and the 2011 elections by a enormous margin. It was under Erdoğan’s government that Turkey recovered from the 2001 financial crisis which brought around massive support, but in 2011 the AKP was accused of following an Islamic Agenda, giving the laws of no alcohol consumption within the University Campus, and the attempt to make abortion virtually unobtainable, all of which are strictly prohibited in the Islamic guidelines, although President Recep Tayyip Erdoğan disagrees any intentions of his laws becoming Islamist. Coming back to the topic, the Government of Turkey now faces a massive uprising. The spark for these uprisings was caused by the brutal assault of environmentalists holding an encampment in the Gezi Park, one of the few remaining green spaces in the European side of the country and Turkey, having a history of police brutality, did not help this situation. This is stated to be one of the primary causes of the uprising along with the violations of the Human Rights.

If a country wishes to join the European Union (EU) it must satisfy a set of comprehensive conditions to be considered for the membership; these conditions are better known as the ‘Copenhagen Criteria’. The primary objective of this is to ensure that the country concerned understands the views and responsibilities of the EU and is ready carry them out. The categories in the Terms and Conditions are non negotiable. A raid, taken on a group of environmentalist holding a rally to protect one of the last green places in Istanbul, as mentioned earlier, caused Gezi Park the uprisings in Turkey. The Turkish Government planned on converting this ecological site into a construction site for a building. Considering that Turkey’s economic state is at rapid increase, if ever Turkey decides to join in the EU the primarily reason will not be economic, it will be due to the unstable and volatile political situation, which seems likely to collapse and thus make conditions non-negotiable. But because of the huge volume of EU rules and regulations, each candidate country must abide the national laws and on top of that the negotiations take time to complete. The candidates are supported financially, administratively and technically during this period till the results are out.

But countries have to apply to be a member of the EU and looking at the Justice and Development Party its chances of even applying are slim. Prime Minister Recep Tayyip Erdoğan gave a speech at an astonishing ceremony stating that, “Whatever you do, we’ve made our decision and we will implement it”, and later in a televised speech he says, “Where they gather 20, I will get up and gather 200,000 people. Where they gather 100,000, I will bring together one million from my party.” He also described the protesters as looter and bums.

Now we see that there is no chance that Turkey will apply to join the EU, at least as long as the Justice and Development Party is in charge, but we might see them in the EU a few years down the line because clearly the present Government has lost the support of the people and they are unlikely to be winning the next elections. With the possible fall of the present government, there some to be a shot a redemption for Turkey and hopefully the beginning of a new era.

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The Econocrat

Founder’s Issue

18th October, 2013

How the British killed our economy T ill the 1800’s, India was a highly venerated and essential economy.

Venerated because it was what every other country aspired to be and essential because it contributed 22% to the global economy. Nonetheless, it would not be wrong to label India as ‘gullible’ or ‘innocent’. The British saw this and realized India to be a means for economic prosperity.

The Industrial Revolution had to be backed by raw material, and there was no better place to find the latter than India.

Clearly, the purpose of the British Raj’s arrival in India was that of economic exploitation and even though there were a few benefits that arose from the British rule, there were no altruistic motives behind it. Clearly, the damages suffered were far greater than the good that occurred. Hence, when said that British Raj destroyed the Indian economy, it is not the opinion of a biased Indian, but an opinion based on facts and opinions of countless economists, who have specialized in this field.

A rather simple way of looking at it is comparing the status of the Indian economy before 1757 to that of post 1947. The contribution of India to the global economy fell from a massive 22% to a meagre 3%. Its wealth status dropped from a rich and prosperous country, to a poor and industrially backward country. Even without recorded measures, it is evident that there was a steep drop in the quantity of natural resources. Astonishingly, the credit for this doesn’t only go to the British colonists, but must also go to the ‘gullible’ or ‘innocent’ Indians.

Devesh Sahai

The ups of having been a British colony were technological advancement, strong markets, and capital amongst a few other things. Nonetheless, this period was one of hindered development and we can pin down two major causes for this. First, comes the drain of wealth. The British ensured that they drain away every last bit of resources before departing.

Therefore all the ‘ups’ of having them around became primarily supplements to the once resourceful land of India, which were of absolutely no effectiveness to the Indian economy. In addition, there were enough internal conflicts to deal with by the end of the British rule. The British might have been labelled as the oppressors in this case but it is also true that there were a significant amount of Indians helping in this oppression. In such conditions, where could one possibly find any development?

sentence suggests, the keyword here is ‘was’, and more appropriately it was the British that made this keyword.

The journey of British India was a gradual one from high employment rates to unemployment rates beyond imagination; form riches and prosperity to poverty and the tattered pieces left of the country. What’s more, the internal issues and partitions that aggravate the terrible state gave the British exactly what they were looking to achieve and cleared a path for them to do as they pleased.

Up till 1757, India had an abundant amount of surplus, which was to be used as investments in the future.

Technically this surplus was used for investments but not for India, but for the British Empire. India might have been rich and resourceful but what it certainly needed was the right infrastructure. Some of these resources might have actually been backed by the correct infrastructure; the finished products and the value they produced were to go to the British. There was a time when it seemed that India had the potential to sustain itself even without any external help or colonization. Of course, as the beginning of the

As of August 15, 1947, British India had completed its journey. The British may have left but the damages they caused had stayed back. The chapter changed and a new journey was indeed embarked upon, but the journey towards the Indian economy’s resurgence was an awfully slow one. Their may be many conjectures about where India would have been today had the British never come.

However, they came, they saw and they conquered. When they left, they may have deformed the economy, but could not eliminate the hope and as long as hope remains the potential for economic growth and resurgence remains.

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The Econocrat

Founder’s Issue

18th October, 2013

Hire the Artificially Intelligent

Arnaav Bhavanani

W

hat inspires us to build things that can do the same things we can? Is it a mere curiosity, as decades of evolution suggest, or is it a sense of superiority that drives us to prove ourselves over and over again? When we create things that are better than us, we have always kept this fact in mind: whenever two forces clash, the stronger one undoubtedly wins. Examples of this are dotted throughout history, and we barely need to look to find them. This eventually brings up the question, are robots practical, or rather, is the evolution of robots practical? Countless movies, books and many individuals have pondered over this, and with the wealth of this information, surely, we have a way ahead. But that’s where we hit a wall.

Perhaps the largest threats robots face today is their struggle with the jobs sector. A robot can perform almost every job performed by a human, and most of the time, better than a human. A simple example today would be in factories.

A massive amount of human labour was used back in the early 1900s to keep the factories afloat and the businesses running. All this changed with the advent of the Technological Revolution; a Revolution we are still living through.

Complex robotics have changed the scene forever, and now perhaps only one-sixth of the labourers are needed, compared to before the Revolution.

All over the world, be it in universities or laboratories, in dimly lit rooms or high-tech government facilities (funded by the taxpayer, I might add) people are working on the next generation of robots. We have seen robots with emotions, robots with hormonal capabilities, robots with the same agility and dexterity as a human being. How much time is left, before we have robots that look exactly like us, talk exactly like us, and behave exactly like us, except for the fact that we can control them? What happens when everything a human can possibly do is done better by a robot? Or more in the context of this publication, what happens to the world’s economy?

The other side of the argument is that the advent of robots has, in fact, created jobs. According to an IFR report, which surveyed Brazil, China, Japan, the Republic of Korea, Germany and the USA, only China showed an increase in unemployment with the advent of robots. The report has worked out in detail the potential increase in jobs that robots could create, with work on electric cars, photovoltaic, the wind and food industry, and of course, the creation of the robots themselves.

In fact, we have seen that more the robots, the more people are needed to handle them. This creates a number of jobs, even though there is a loss of jobs as well.

There are many far-reaching effects of robots in the world.

Economic monopolies will threaten the very future of the human race, if producers of cutting edge robotics build

a monopoly for themselves. On the other hand, we must look at the factor of control. How far are we willing to let robots evolve? Curiosity has always been a human attribute, and it is not a new concept that for a large change to happen, the old system must first be destroyed.

Do we want to destroy a possible but unlikely, economic utopia created by our own creations, or do we want to wait, and hope?

Perhaps it’s time to start giving serious thought to the future, because this is not just another newfangled piece of technology. It is the beginning of an era.

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The Econocrat

W

Founder’s Issue

18th October, 2013

Why China is inevitably

ith the American government having recently touched the pinnacle of downfalls, and facing a shut-down, many have pointed to the shams of the Presidential form of government. However, as we rejoice and take refuge in the fact that we followed our conceiver’s into developing a Parliamentary form of government, it is necessary to take a look at the larger issue arising from the situation. The issue being that the US is slowly moving to a situation, where it not only seems probable, but also inevitable that their economic system will soon be overtaken by that of the Chinese. The two of these nations currently comprise the chunk of all the major economic systems in the world, and hence, it is imperative that the relations between these two remain in tact.

Nevertheless, the more the American system seems to stumble onto itself, the more the Chinese seem to be threatening them.

It is a well-known fact that China is a huge investor in bonds of the US Treasury.

Hence, after the shut-down was imposed on the government in the States, signals immediately started coming from Mr. Zhu, a senior Chinese official, to call the US to “earnestly take steps to resolve.” As much as this was an encouraging statement for the media, the message it sent to the US was not so polite after all. It could so easily have been “you have to make it work, now!” The Chinese have shrewdly, albeit slowly, put themselves in a place where they can call the shots on the US economic decisions, and considering the deadlock the Obama government finds itself in with the Congress, the Chinese stronghold is only going to increase. I am going to illustrate exactly how we can portend China surpassing the US in terms of economic systems, over the next few years.

To begin with, it is important to assess carefully the situation being dealt with here. Ever since the Economic Recession on 2008, even though America is recovering its economy at a rather fast pace, its production has been repeatedly falling, month after month, year after year. The amount of work the average American does is diminishing, hence reducing the overall efficiency and productivity of the workforce. On the contrary, this has been China’s biggest strength for as long as one may recall. China prides itself on its strong manufacturing capacity, which allows it to show for every second article in our households to have the ‘Made in China’ tag across it. I would like to draw an example from the current state of our native economy too to explain this paradox. While the rupee has been constantly taking a free fall of sorts, the sole rationale the government has been able to provide is that this is going to be, at the least, helpful for our balance of payments. With the devaluation of a currency, it gives a nation a chance to export its goods at a relatively cheaper rate in the International market. However, given the small size of our manufacturing sector, there really isn’t much we can export. Hence the pressure!

On the other hand, China, given its huge manufacturing sector, can make use of a falling Yuan to expand its exports. And what is not at all surprising is that it has done exactly that. They have purposefully kept the rise of Yuan in check against the dollar, to be able to have a stronghold in the export market. What is even better is that, the country that they have been exporting the most too, is

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The Econocrat

Founder’s Issue

18th October, 2013

going to Overtake the US

Pulkit Agarwal

the consumerist-driven, United States of America. Hence, the US finds itself in a situation where it is being played by China from all sides.

Moreover, what China has also done is gather 1.1 trillion dollars of US debt, of which a majority is in the form of US treasury bonds. This is also, partly, a result of the fact that China is a large gainer in terms of balance of trades with the US: it exports a lot more to America, than it imports from them. Therefore, over a span of years, China has put the already diminishing manufacturing sector of the States, bust! Also, China can now very conveniently threaten the US to dump these bonds and the dollar on the market, which would destroy the American economy beyond repair. It would put the hustle and bustle of New York, silent; it would put Wall Street out of business; and it would put thousands of Americans out of jobs. Thus, the US currently finds itself in a vulnerable and delicate condition, where China has the liberty to call the shots! The dollar could sink, and leave the Yuan hovering way above its current value; the cost of living for the average American could be out of reach; inflation could send the prices sky-rocketing; and in simple words, the world’s largest economic system could be paralyzed by a Chinese makeover.

The sad story for the Americans, who are sitting on the cusp of an economic transformation, is that this slow change is going unnoticed. Because the bulk of the change is taking place at the top, the citizens are not able to understand the gravity of the situation. For them, as for us, the US economy is simply recovering from one of the worst crises of recent times. But the underlying truth is still that the Chinese are making incursions (not the ones they are making on our borders, but figurative, economic incursions) in the US system, which can ruin them. The US must reverse the condition to be in a strong position once again, one from where it can dictate terms. Because as of now, China is able to buy more and more debt, and being the self-sustaining, robust, economy that it is, it can leave the far lazier American economy walloped. Therefore, it is evident that looking at the current scheme of things, a Chinese overtake of the US in the economic sphere seems inevitable.

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The Econocrat

Founder’s Issue

18th October, 2013

FDI in Multi-brand Retail E

ach and every single Indian has experienced the magic of the hustle-bustle of the market. And I’m not talking about the supermarket, either. I’m talking about the flea markets. The mom and pop outlets.

The bhaajiwallas and the sabziwallas and the sweaty, paan-chewing section of Indian society that caters to every middle class family in the country. Now, imagine them gone.

Entire acres of market, packed up and gone. And in their place stands a large Wal-Mart. What does this mean, you’ll wonder? Where did all the people go? A section of the magic of Indian culture, sliced away to be occupied by ugly grey and steel buildings, selling the same things, at a higher price.

This is what the introduction of FDI in multi-brand retail is going to do.

In the Delhi Commonwealth Games, slums were destroyed, pedallers picked off the streets and dropped outside the city, and the remaining slums were screened off by large vinyl boards that read “Delhi-ciously yours”. That was then, when there was no time to get rid of the slums.

Now, when foreign companies like Wal-Mart and Kmart stomp their way into the Indian market, these amazing places with all their diversity will vanish. And the government talks about employment? The only people who will be employed are educated people, and looking at this section, the disorganised retail sector of the Indian market today, education is one thing that is lacking, and the only thing that such shopkeepers possess is a sharp market sense. Where will they go? Companies will bring their own hordes of analysts and engineers to

increase their strength in the market.

Slowly, millions of dukaandaars will leave the cosy confines of the city, and return to their villages, destitute and in inescapable poverty. Is this progress?

Another thing, only 4% of the Indian market is the organized sector.

The other 96% is the disorganised sector, the lower class sector. The introduction of FDI in multi-brand retail will push out 96% of India’s market, so that a supermarket chain can guzzle on the profits of having a monopoly on much more than just 51% of the Indian economy, the benchmark that the government has set for foreign investors.

According to ‘Business Today’, this decision will endanger the livelihoods of 40 million people. Any small enterprises left will lose their suppliers to these companies, and the suppliers themselves will soon lose their control, relinquishing themselves to multinational corporations.

Supply chains will dry up, as foreign companies establish their own networks. Jobs will be lost, people will be displaced and destitute, tradition will crumble, in essence, what makes India what it is today will vanish under the looming shadows of the rest of world, each trying to get their share in the largest economy in the world.

E-Commerce, on the other hand, poses and entirely different view. As this marketing is conducted online, the impact on the physical market will be almost zilch. The market for these e-companies has been opened, however, there are innumerable flaws

Arnaav Bhavanani and a lack of clarity in the marketing policy, which India has yet to answer to. Such companies are not willing to come into the Indian market unless they are completely sure that they will be able to gain a foothold here, and thus, though the market has been open to 100% in single brand retail and 51% in multi-brand retail, not a single investor has arrived on the scene. This market, however, is lucrative, a recent instance being the $50 million investment by eBay in Snapdeal.com, an Indian e-commerce giant.

However, the fact remains that E-Commerce is capital-intensive, and according to Sanjeev Bikhchandani, Founder and Vice Chairman of Info Edge, “ E-Commerce is very capital intensive, and there simply isn’t enough money to go around. Indian funds are small. E-Commerce in India has been funded over a billion dollars, and it needs a couple of billion more for a viable e-commerce sector in this country. That money is not going to come from Indian sources.”

Thus, we see both the pros and cons of the introduction of FDI in multi-brand retail both in the physical sector and the virtual one. However, we have yet to see an answer to problems that either one is facing, and it might be some time before Wal-Mart or Kmart open up down the street, or even in the next window you open on the Internet!

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The Econocrat

Founder’s Issue

18th October, 2013

US Debt Default

Mr Mohd. Istemdad Ali

T

he National Disaster Relief Force (NDRF) and the government in India have definitely done a commendable job by reducing the damage to a large extent due to be caused by super cyclone Phailin by taking adequate measures in time. Hopefully the government must have contemplated a contingency plan in case the risk of a US debt default ever becomes true. Australian opposition finance spokesman, Barnaby Joyce, believes the US debt default would be an economic Armageddon and questioned the state of preparedness in Australia if the risk became a reality. “Default would be an act of collective insanity” said William Buiter, Citigroup’s chief economist.

Although historically no one has ever lost a single penny invested on US bonds. But what would be the economic repercussions of such a default if it ever became a reality? It would severely damage US credibility as a global financial player and the provider of the world’s leading reserve currency. Lending by banks generate most of the economic growth. Banks are able to lend far more than their total collection of deposits but have to follow “ratios”. The ratios require them to keep certain funds. The bulk of these funds are US government bonds. In case the US defaults the reserves become illegal and thus banks will have to stop lending.

In the emerging worsening situation the companies start suffering from lack of profitability. This leads to lay off, fall in corporate taxes and sales tax .Investors will buy less stocks as companies have dim prospects and in the future the government will find it impossible to raise money through bonds. There will be a dramatic cut in public expenditure by the US government especially its own military expenditure to the tune of $150 billion per year. According to Andrew Garthwaite from Credit Suisse a default would be catastrophic and lead to 5%contraction of the US economy and 30% fall on the Wall Street with major ramifications for the world economy.

The effect of a debt default will be catastrophic for the world and global economic recession will follow which will make the recession of 2008 pale into insignificance. If the US does not pay $2 trillion to the Chinese,$1 trillion to the Japanese and $1 trillion it owes to others, the outcome would be a shift away from the US Dollar as the international trading currency and a shift to Chinese Yuan and China may become immensely powerful player overnight. US government will have to pay very high rates of interest to attract buyers of its debt. This will lead to rise in interest rates in developing countries like India which can have huge real cost to the society. Hence India should develop greater self reliance to keep providing for the fundamental requirements of its citizens.

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The Econocrat

Founder’s Issue

18th October, 2013

The Quiet Collapse of the Italian Economy

A

lthough Greece and Cyprus have been the primary countries under the scanner regarding the Euro Crisis, it’s countries such as Italy and Spain that pose the actual trial for the common currency’s future.

Being the third largest economy of the EU, it is Italy that offers a greater threat to the Euro Zone and the rest of the world economy. Its macroeconomic conditions have shown no improvement in the recent past, and the country’s economy has contracted significantly since 2012, facing more economic problems than expected along with the an unstable political situation. Factors such as employment rates and the country’s tax burden, all indicate towards the same conclusion. This country’s economy is on a steep decline, and that is for a fact.

Italy is the eight largest economy in the world, and should it fall, the consequent economic disaster will be the worst seen in the past decade. But then what’s responsible for pushing the Italian economy over the edge? Well, here are the key reasons for this steep decline: the mammoth debt, the prevalent corruption, poor productivity and its slow South.

The primary reason for the fragile state of Italy’s economy is the colossal debt. The debt that economies of Greece, Portugal and Ireland have as a whole is still less than the debt that Italy alone holds. Italy has the second worst debt ratio in the entire Euro Zone, only behind Greece. This is no new phenomenon for the Italian Economy, as for the past twenty years Italy has had a debt ratio of well over one hundred percent.

So what changed? Well, Simply the growth. In the 1990’s, the Italian Government learnt to relish gradual and consistent growth in GDP. The debts were stable and it was possible to pay financial interests on what they already owned. Then in 2001, Italy’s growth rate began to sink and finally hit rock bottom during the global recession and has hardly recovered since. By the end of 2011, Italy’s bond yields shot over 7%.

What makes this mark significant is that, Ireland and Portugal were unable to keep up with the burrowing expenses after crossing the mark and the EU had to bail them out. Once a country crosses a 7% bond yield rate, traders have to post extra security to buy and sell bonds, making this whole process high-priced and less attractive, forcing investors to back out of Italy. The result is that most likely the government will not be able to sell enough new debt to cover the old ones. A problem similar to what Bear Stearns and Lehman Brothers faced.

Poor long-term growth usually suggests poor economic basics, and Italy’s fundamentals are bad in particularly. Though it is difficult to point out a single factor in this, the low rate of productivity can be attributed as a major one. The most important route towards growth for most western countries is productivity. Meanwhile the productivity rates for Italy have exceedingly low, even though Italian employees put in more work hours but producing lesser. This has been so reaching back as far as early 1990’s. Because small business holders dominate Italy’s economy, its capital markets are poorly developed and compared to other Euro Zone countries Italy suffers from unnecessary regulation and a deficiency of R&D spending. All of these small-scale businesses are in no way able to achieve a crucial economy of a scale to be effective enough. The bottom line, you have a country whose economy is dominated by small scale companies who lack the funds to make improvements thus eliminating any form of competitiveness.

Then there is the 8% unemployment rate, which is rather reasonable comparatively but is only a small part of the whole story. Italy has split job market, meaning there is a sector for the young and another for the old. Employment laws make the senior employees hard to fire and thus the young employees are left hopping jobs. This certainly is not the recipe for effective labor force.

The thing that puzzles most economists is why is that Italy’s growth slowed down in 2000 when it always been an economic disaster prone area? Italy’s faulty economic policies and low productivity are not new

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The Econocrat

Founder’s Issue

18th October, 2013

Ritvik Kar factors and in fact Italy’s been improving in some areas such as education and capital formation. But one important factor that has been dwindling is the governance. Since the beginning of 2000, the measure of good government has been deteriorating at an alarming rate. But that really doesn’t come off as a surprise. If the Prime Minister is fighting charges of Tax Evasion, it’s a sign that something’s gone wrong. The levels of corruption and weakness of the law allow underground businesses to flourish and thus 15% of the Italian Economy happens to come from these businesses.

This is a very lethal factor for business.

In the 19th Century the Northern States, the Papal States surrounding Rome, and the southern Kingdom of Sicily were united to make one country, Italy.

Some believed that these three regions were far too distinct to function as a single unit and this holds true till today, as the cultural distinctions have made it difficult for Italy to work as a whole. Looking at the GDP of the different parts we can show this difference. The GDP per capita in the North and Center is almost 40% more than that in the South, therefore holding back more than a third of the entire country’s population. Then we add the fact that unemployment, crime and underground businesses are all concentrated in the South, we can com to the conclusion that the South is in a way holding Italy back from its achievable progress.

Italy doesn’t have a huge housing bust like Ireland’s and its expenditures haven’t been out of hand like Greece but in the end its problem is still the growth. And while experts say that the right changes to the labor market might help boost productivity, cutting down on budgets could place the country in an even more fragile position. What is the possibility that Italy might have to leave the EU? Well, giving Italy the control over its own currency would enable Italy to inflate away part of its debt and help rebuild its economy but then Italy is also the third largest economy in the EU. Would the EU let such a key country just leave and allow the Euro to maybe suffer more? Well, that’s to anybody’s guess really.

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The Econocrat

Founder’s Issue

18th October, 2013

The fall of the rupee

A

pressing problem that’s been plaguing our country (and it’s rather shaky government) of recent times is that of our currency. As I’m sure most of you know there has been on a rapid decline over the past summer holidays and naturally, this cannot be taken lightly as it impacts each and every one of us. As this storm shows no sign of letting up it is best if all of us understand exactly what is going on and it’s my job to explain it all to you in the simplest way possible.

So the first natural question that arises is “What determines a currency’s value?” Well, I’m sure some of you have heard about it being determined by the gold reserves of a country and this true, which is true but only to an extent. When a county’s currency is evaluated on the basis of the gold in that country’s possession we say that the country follows the gold standard.

Before the use of the gold standard was largely discontinued as countries could only print currency if they had that amount of gold to back it up. But now since not a single country in the world uses the gold standard the value of a currency is determined on different terms. Just like any other commodity in economics the law of supply and demand influences the value of a currency. When more people require an item and there is a less supply of it, the value of that item is logically, going to rise. But if the demand for it is less and there is an excessive amount supply around then its price falls. Yes, it’s as simple as that.

Now in the context of the rupee or dollar or for that matter anything else the blame lies with the government.

However, it’s not entirely their fault

this time. The recent decline is greatly due to global influence rather than domestic weakness. For the first time since the economic slump in the US there is serious speculation that the situation might improve, and it is backed up by hard evidence. As a result, the dollar is regaining momentum. As a whole, India imports more than it exports and so its currency falls. The more a country exports and the lesser it imports, the stronger its currency becomes, due to it being more independent. One of our main imports is oil (fuel). The central government buys petrol from other countries but sells it at a lower cost and subsidizes the rest.

Conveniently enough, the state governments have a thirty per cent tax on petrol, which they are not willing to let go of. Because most countries use the dollar standard we are stuck buying dollars and spending them just as fast, as are a lot of other countries, causing the dollar to rise.

Our currency is weak because we have no dollar reserves. This is also why a threat to the US economy is a threat to global economic stability.

One of the many impacts of the fall of the rupee is the decline of the Indian stock market. There is news of millions of dollars being withdrawn ($545.7 million in June and July alone) from the market by the Foreign Financial Institutional Investors. Nevertheless it’s not completely bad news. The cheap value of the rupee makes it easier for businessmen, traders and the country as a whole to sell their goods abroad. This decline is also good for people who receive money from relatives abroad as they get more rupees in exchange. Right now,

Manan Pradhan it’s also a great time to be an NRI, especially if you plan on re-investing in the country. Finally, but perhaps most importantly, this fluctuation in the rupee’s value will affect the daily budget of the average citizen in more ways than one, needless to say, negatively. Before jumping to any conclusions it is worth noting that besides the Japanese Yen and the Chinese Renminbi the dollar has appreciated against practically every other currency.

Lastly, let’s talk about what can be done to salvage the situation. The obvious solution is for the RBI to strategically start buying foreign exchange and, for lack of a better word, hoarding it. However, to do this the RBI must have money, which it does not. The money is in the market and to get it the RBI will have to take the money out which will lead to more inflation and economic instability. In conclusion, this will not work. The one sure way to rescue the rupee is to sell (export) more than we buy (import).

Sadly, this will only add to the woes of our already ailing government and there seems to be no quick solution on the horizon.

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The Econocrat

Founder’s Issue

18th October, 2013

China’s Crisis could Pummel the U.S. Economy Pulkit Agarwal

T

he world economy begins and ends with the US economy. Indeed, this rather unfair statement did in fact see reality when the US economy dived into a recession few years ago. Along with it, it took so many facets of various nations’ down too. For instance, let us draw a very simple example from the ‘rupee.’ When the rupee was busy taking a free fall (as it still is), foreign investors became apprehensive about how good a destination India was for their funds. No matter how many trips Mr. Chidambaram took to the US to sell the ‘Homeland India’ story again, the evidence kept slapping him and India back in the face: the Economist Prime Minister had failed India. The reason: the United States economy was suffering. So yes, to a certain extent the Americans were responsible for the world economy.

However, they, as it turns out, are not the single source of funds to the world. Even they needed a provider, a lender, a banker. And hence, the world took note of China.

Now if you ‘Google’ the Chinese economy, you would probably find that it is in fact a poor one, producing a ‘mere’ $9100 per person, which is far below the $49800 per capita income of the US; nevertheless, this ‘small’ and ‘meagre’ economy is in fact the largest banker to the USA. Owner of $1.264 trillion worth of treasuries, China plays the shrewd role of giving the US leverage.

Consider this, China loans out money to the US, so prolifically that it actually holds over 11% of the debt held by the public in the USA. As a consequence, the dollar soars in the sky, while the values of Yuan remain low, to keep China’s exports high. The reason for this is that China depends, heavily so, on exports to the United States. Shipping of 17% of its exports to the US, clearly shows how important this outflow is to China.

While China avoided the Recession during the Financial Crisis of 2008, the US did not. The secret behind this being that even though there are over 3800 banks in the land, two-thirds of those are state-owned. This is where a majority of the household money lies. The banks can then leverage this money and lend it at extremely low interest rates, thus enabling Chinese manufacturers to retain their reputation as the world’s largest.

Although this system worked for them in 2008, it may be detrimental for now the country is facing a shortage of liquid funds. The monetary policy remains as tight as ever, and with the Chinese companies requiring more and more cash, this calls for selling of bonds and assets of these companies. Eventually, this might trigger a fall in prices, so large, that it can cause serious issues in the banking sector.

As is evident, more than China, the United States is in no position to witness a banking crisis in the People’s Republic.

Not only will this stop the low interest loans that Chinese banks give to the American investors sitting in Beijing and Shanghai, thus reducing their productions and profits, it will also pummel the American economy because of the debt that they hold. China would simply stop purchase of American bonds and treasuries, and truth be told, that is all that the US currently runs on. Therefore, my only appeal to the Americans out there: pray for the Chinese economy to keep on prospering, otherwise, this time when they go down, the Chinese will be the ones carrying you down with them.

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The Econocrat

Founder’s Issue

18th October, 2013

Land Acquisition Bill: Improvement over original act? Mr Mohd. Istemdad Ali

L

and Acquisition Act of 1894 empowered the government to acquire any land it wished in the name of ambiguous “public purpose”. There was no requirement of obtaining any prior public consent of the affected parties. No attempt was made to provide rehabilitation and often land would be acquired at a short notice by the Collector where the affected people neither had the chance to challenge the acquisition legally nor find alternative arrangements of their own. The practice continued after independence right up to 1991 when land began to be acquired for private sector due to ushering in of liberalization in the Indian economy. There was little attempt by the companies to train the affected people to get jobs in the development projects and most often educated people from other regions got the jobs, thanks due to liberalization. Companies were unwilling to support expenditure on education and health care which they did in the name of Corporate Social Responsibility and at the same time refused to acknowledge the negative externalities like pollution and environmental degradation imposed by their own projects.

Host of development projects like Tehri Dam, Sardar Sarovar Dam, Singur and Nandigram led to growing protests by land owners. To some extent there was increasing demand from the corporates as well for a transparent and accountable land acquisition process. It was against this context the Land Acquisition Act (2011) was introduced and finally passed in the Lok Sabha on 29th of August,2013.

The Act will apply only when a private developer acquires land more than 100 acres in rural areas and 50 acres in urban areas. If a private project developer wants to escape the clause ,he/she will buy land in multiple parcels instead of one time acquisition. The Act will also not apply if land has been acquired under 16 previous Acts like SEZ Act 2005,Atomic Energy Act,Cantonments Act,Damodar Valley Act,Electricity Act and National Highways Act and many others. However the new Bill adds that consent of 70% of the land owners is required prior to acquiring land in case of “public-privatepartnership”project,while consent of 80% of the land owners is required prior to acquiring land for a” private” project.

Unlike the original Act a proper procedure is designed to acquire land and awarding compensation,rehabilitation and resettlement which will be done by a designated government authority. A Monetary compensation of up to 4 times the market value in the rural areas and up to 2 times in urban areas will be given to the land owners. Land may also be leased to retain the ownership and at the same time earn money from the project developer. A Bevy of other monetary compensations like financial assistance of Rs.1,50,000 for constructing homes,a one time monetary compensation of up to Rs.5,00,000 or annuity of up to Rs.20,000 per family per month for up to 20 years, indexed to Consumer Price Index for Agricultural Workers(CPI-AW) will be provided. Each affected family will receive a transport amount of up to Rs.50,000one –time for all necessary things to the place of rehabilitation and resettlement. Special provisions will be made for SC/ST families where land is appropriated under this Act. The project developer will have to obtain environmental clearances from MoEF and a detailed Social Impact Assessment will be done by an expert group appointed by the respective state governments. Also not more than 5% of multi cropped land can be acquired to safe guard food security.

The monetary provisions of the Act are not mandatory which should done immediately. Also the monetary compensation of 4 times the market value in rural areas may not be enough as the value of the land in rural areas is usually very less prior to the coming up of government projects. Some MPs have demanded 20 times compensation in rural areas. Corporates have raised concern over 2 times compensation in urban areas while MPs have demanded a higher compensation as value increases faster in urban areas compared to rural areas. Activists have stated that the compensation amount would be a very small proportion of the overall investment and so would not affect the project budget significantly. The Act needs also to clearly state the time line under which such facilities are provided.

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The Econocrat

Founder’s Issue

18th October, 2013

Welfare State

Ms Purnima Dutta

I

n a State that calls itself a welfare state, the words ‘Development’ and ‘Growth’ are expected to be synonymous. That is to say that the fruits of Growth are channelled into Development. The Growth here of course refers to economic growth, which is determined on the basis of indicators such as growth in GDP and GNP. India’s growth, by that definition, has certainly been impressive over the last decade. (This is of course only after factoring in the effects of the global economic crisis, which has taken a toll on India’s GDP growth rate). However, this growth has been possible only due to bold and radical economic policies which were flagged off in 1990s with the end of license raj and the beginning of liberalization.

An indication of such growth is evident in the NSSO findings that between 2000 and 2012, the rise in consumption expenditure zoomed by 60 per cent. On a more sobering note, however, the same report states that such expenditure increased by 30 per cent for the poorest segment. This report factors in inflation where the poor are most directly affected.

Therefore, improved GDP growth does not automatically serve as an indicator of development since these average figures do not take into account sharp inequities of distribution and access to economic opportunities, goods and services.

That India’s rise in GDP has not led to development is obvious when one looks at key indicators of development such as calories intake per day per head, rise in levels of access to educational and healthcare levels or fall in unemployment levels, to name a few. As the National Sample Survey Organization indicates in its report to Parliament this year, calorie intake per capita has fallen by 106 points over figures in 1994-95. Additionally, the fact that India has the world’s second worst record of child malnutrition substantiates the previous figures.

As far as access to primary education is concerned, surveys, particularly by independent bodies, consistently draw a link between lack of access to schools due to absence of infrastructure and continued low literacy rates amongst the rural population. Yet another parameter to measure development is healthcare. Here too, the figures reflect a dismal state of access to healthcare services particularly amongst the rural poor. Of the global figure of four million infant deaths every year, one million occur in India alone! This figure is inclusive of infant deaths in countries like Somalia, Bangladesh and Afghanistan.

While adopting policies for sustained economic growth, the Government has also taken various initiatives to improve the indicators of Development, such as the Food Security Bill or the MNREGA. But the statistical differences in rates of Growth and Development remain alarming. Although it is difficult to comment upon whether Development has been sacrificed at the altar of Growth due to current economic policies, it is apparent that while growth has been a priority, focus on development has been half-hearted at best. As for implementation of the developmental policies, that is another sordid saga by itself.

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The Econocrat

Founder’s Issue

18th October, 2013

Why is the Euro important to Germany?

S

ince the inception of the European Union almost 60 years ago, Germany has been at the very heart of this economical and political union. In the past Germany has play a key role as a way of collecting coal and steel resources and preventing future wars and recently it’s been active bailing out other EU countries from nearly bankrupt states. It has played its role in the past and it’s playing its role now. The fact that its economy constitutes of almost 30% of the European Unions economy, Germany has had to bear the brunt recent rescue deals all over Europe. Possibly, if Germany wasn’t there to act as an anchor to the European economy, the crisis would have already been over and Europe’s economy would have been beyond repair.

German Chancellor recently issued a statement, asking all European countries to put their nationalistic egos aside and come down to finding a final solution to their crisis. Germany is no stranger economic crisis and recessions as it suffered greatly during the World War’s period. They suffered extremely rapid and out of control inflations at the wake of the World War’s and by the 1920’s the country’s currency was left undeniably insignificant. After World War II, Germany rebuilt its economy from scratch and got to where it is today. Thanks to its strong manufacturing sector, Germany’s economy continues to thrive and compared to its neighbouring countries, it’s doing really well for it self. So then why is it that Germany is willing to risk everything for the sake of the Euro? Why is the Euro so important to Germany?

Germany has long been the powerhouse of the European Union, but that does not mean that it’s not vulnerable to financial crisis. It might be Europe’s strongest economy, but it also has high debt rates and unemployment rates. The only reason the recession has not hit it as badly as the other countries is because of its manufacturing sector which implies that it does not have to rely upon the financial service industry or the property market, both of which have been critically hit by the global economic crisis. The Germans have benefited greatly from the Euro, since their conversion in 1999. Under normal circumstances no country would want to be paid in a weak economy, but in this special case, weak economy is the tick to success. So by leaving the Euro to fall, the Germans would be shooting themselves in the foot. Let me elaborate. When Germany switched over the Euro in 1999, their exports were at about 469 billion Euros and by 2010 it reached to well over a trillion Euros. Meaning the exports as well as the growth rates have doubled and all thanks to the Euro. Do not doubt for a second, the quality of German products, but the only reason they are able to sell them at such a competitive price is due to a cheap currency. A second way the Euro benefits the Germans is that it gives it a bigger market to dump its goods. Twothirds of Germany’s exports go to members of the Eurozone eliminating the risk of foreign currency exchange and thus making Eurozone countries buying more affordable German products. This by the way is only considering the 17 EU countries and not the 35 that are a part of the EU’s free trade area.

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The Econocrat

Founder’s Issue

18th October, 2013

Ritvik Kar But above everything, here’s what keeps Germany’s love to the Euro. Analytically it would cost Germany around 20% to 25% of its GDP just to walk away from the EU. After that the cost of going forward is estimated to be at around 3,500 to 4,000 Euros per citizen, a year. But by leaving the Euro Germany would benefit in the way that it would no longer have to bail out countries such as Italy, Greece and Spain saving up to 900 billion euros and then there is the part that Germany’s own currency would be much stronger than the present Euro. Then there is the factor to consider that this new currency might be too strong to support Germany’s present export driven economy, which would be much more disastrous in the long run. Thus, considering that the Germans were to work with their own currency, then their products would become extremely high priced and unaffordable. This would cause so much instability in Germany that the crisis in Greece would look like nothing in front of it.

The bottom line: Germany needs the Euro, but it needs it to be weak in order to survive.

Germany needs countries such as Greece, Spain and Italy to survive to ensure the weakness of the currency, which might not sound all that great but it work’s well for the Germans and as far as we know, Germany is going to go all out to ensure the status quo remains unchanged.

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The Econocrat

Founder’s Issue

18th October, 2013

Picture Quiz Q. Identify this economist – he played an instrumental role in the planting the seeds of investment in Wall Street

Benjamin Graham

Q. Identify this street located in Hong Kong

Causeway Bay

Q. Identify this past governor of the Reserve Bank of India

C. D .Deshmukh

Q. Identify the airport which is named after U.S. Secretary of State, who played a vital role in the initial years of the cold war. Identify the airport which is named after U.S. Secretary of State, who played a vital role in the initial years of the cold war

Dulles International Airport

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The Econocrat

Founder’s Issue

18th October, 2013

Q. Identify this 19th Century economist who is responsible for the premise of the European Economic Community today

Freidrich List

Q. Identify this man – an important member of the Indian Finance Ministry at the time of independence

R. K. Shanmukham Chetty

Econospeak

Is India Sacrificing Welfare For Economic Growth? Is India Sacrificing Welfare For Economic Growth?

True, because the economic growth that India has been going for in the last twenty years is a narrow economic growth because poor people have been ignored. Patience is a vice, disguised in the form of a virtue. We have been patient with our leaders for far too long. It is time that the people of India realize that impatience is the only course of action available.

Anshul Tibrewal I believe the two are separate and distinct issues. Personally, I do not see where our economic policy compromises on our sovereignty, irrespective of the goal.

Utkarsh Jha The global community has entered an era of economic governance in which major political decisions are influenced by and judged upon their economic outcomes. On the part of the Indian government, it has ever since been increasing the volatility of the domestic market by letting nations like the U.S. infringing upon its internal operations, both through political and economic issues.

Yash Upadhyay

India’s Economic policy is very distinct and the goal, very narrow.

The country’s Sovereignty is protected by our constitution and its leaders ironically, the President, the Prime Minister and Finance Minister are sound economists and together have created a compromising situation, with regard to the country’s national and international economic policies.

Ms Anamika Ghose It is an attack on the principles on which our country attained freedom, that today we are looking at the myopic goal of growth, rather than the ideal aim of establishing a welfare state.

Jai Singh Yadav and Arnav Goyal

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The Econocrat

Founder’s Issue

18th October, 2013

An Accounts, Commerce and Economics Department Publication © Copyright: The Doon School, Dehradun