Golden Issues in Indian Econony

This is one of the 'Did you know' series posts. I had an opportunity to attend Dr. C Rangarajan's speech on 'Indian Economy and the way forward' yesterday. The speech went on for about an hour and half including Q&A from audience. It was a very good refresh of my Macro Economics class I attended 3 years ago. One particular point caught my attention and I felt its my responsibility to create awareness about it.

He mentioned about various challenges that Indian Economy is facing and one of them being Current Account Deficit (CAD). Its basically net of inflows and outflows of foreign currency. We are financing our foreign currency needs (basically arising out of imports) using the capital inflows from foreign countries. This is certainly not sustainable. If there is a fluctuation in foreign capital, we cant service our current account resulting in depreciation of rupee, hurting our exports. One of the prime reasons for wide CAD is import of Gold. I was astonished to know that not an ounce of Gold is produced in India. Every particle of yellow metal we see around us produced outside of India. We imported close to $54 billion worth of Gold in last fiscal year. At the moment we have close to $90 bn CAD. 

Why do we love Gold so much? Gold is generally purchased in two modes, one as Jewellery and other as Asset (in physical form or ETF) for investment. When the inflation is hovering in double digits and India Inc putting pressure on RBI to lower interest rates, Gold appeared like a great investment option for Indian citizen to save money. Gold in the form of asset does not result in any productive form of investment. 

Dr. Rangarajan suggested that as the inflation comes down, hopefully investment in Gold comes down resulting in lesser imports. Guess how much of Gold we imported in last fiscal year? A thousand tonnes !! Woah...

GDP and GNP

Following post is a courtesy from the text book Macroeconomic Policy Environment by Shyamal Roy.

We all know that GDP is Gross Domestic Product. It is a measure of economic activity in any country. GDP is simply calculated as sum total value of all goods and services produced in that country. It is usually measured every year, but of late due to volatilie economic conditions, it is measured every quarter. Ofcourse, more than the absolute number, the rate of change in these numbers every quarter is what makes interesting for stakeholders.

Now, what is Gross National Product (GNP)? GNP is simply the total value of goods and services producted by the residents of a country, irrespective of their geographic location. For example, people employed in Infosys India, goes abroad and earns money will be counted in the GNP of India, but will not be part of GDP of India. Let us say this employee is working in USA, his income will be part of US GDP and GNP of India. Now, you might say is it true for NRIs? No, the GNP is calculated only for resident Indians. So, obviously if this employee is staying beyond 180 days, his income will not be part of India's GNP.

Let us consider one more interesting number called, Net Factor Income from Abroad (NFIA). This number is very easy to derive (theoratically). Just take all the income earned by residents of India from rest of the world and subtract the income earned by non-residents of India in India. Currently this figure for India is negative, which means the income earned by foreigners in India is more than the income earned by Indians in outside India.

Do you now see the link between GDP, GNP and NFIA? Can we say, GDP = GNP - NFIA? Do you want to think how? Comment me if you dont get it.

Are you serious? Do you really want to blog that way?

check it out...

http://www.ted.com/talks/yossi_vardi_fights_local_warming.html

Whats Local Warming?

Moral Hazard and Adverse Selection

Economists refer to this term 'Moral Hazard' as someone's behaviour is not observed, then it affects the probability or magnitude of the payments. For example, if your car is fully insured, then you are less likely to be careful while driving. Or if you house is fully insured against theft, you will be less diligent about locking doors or installing an alarm system.

Adverse Selection is a form of information asymmetry. For example, in used car market, the seller of the car knows much more information than the buyer. When making a purchase, buyers view all cars as 'medium quality', in the sense that there is an equal chance of getting a high-quality or low-quality car. Because of such asymmetric information problem, low-quality goods drive high-quality goods out of the market. This phenomenon is sometimes referred to as the lemons problem. Another example is, how insurance companies sell premium. They hope that there are more healthier people taking policies than less healthy people so that the costs are averaged for Insurance companies and they can make some money too.

New Drug for a Pharma company

Did you know that under guidelines established by US FDA (Food and Drug Administration), no drug could be sold in the US market until it underwent three stages of successful clinical testing and sruvived a rigorous approval procedure?

Only one in 20 trail-phase drugs was eventually approved for public use and even successful candidates often took 10 years and 50,000 pages of documentation to win FDA approval. The total cost of this process was reported to be between $500 million to $880 million.

Now do you know why someone sells an antibiotic for 300 rupees a tablet?

Would you buy imported Apples or Domestically grown?

If you are a sensitive Global citizen caring for climate change, consider answering this question. Lets say you live in Bangalore, Would you buy a domestically grown Apple or buy an imported apple while staying sensitive to the climate? If you answer Domestically grown apple would have less impact on climate, you could be wrong. The producers store domestically grown apples in cold storage warehouses for long duration (could be 3 to 6 months based on summer) and this energy would have resulted in more carbon emissions than the ones due to transportation of imported apples.

Wal-mart's Annual IT budget

Here is another 'amusing' fact - Did you know that WALMART's IT spending is only second to Pentagon? With sales of around $253 billion, WALMART spends roughly $4.5 billion on IT. Though this figure is not publicly available, this is derived from the usual percentage terms (1.8% of sales) of retailers.

Air Express: Document Carrier

Another post in my 'Did you know' series. Air Express service, in other words the courier service that air ships your documents or non-documents which weigh below 50 KGs check in the collected consignments as excess passenger baggage. :-) In a normal case, any cargo beyond 50KG goes as air cargo in cargo planes. But this has certain limitations such as timing, synchronizing flight connections, safety of documents etc. So, courier companies became innovative and they actually carry your documents or small boxes that you want to ship by air, either domestic or international with the help of passengers. There are some intermediate companies that are into this business of 'supplying' passengers who just tag along the baggage of courier companies and 'travel' with them. Once they reach the destination, the courier company's baggage is taken over by the respective local office. The passenger has absolutely nothing to do with the baggage.

Now do you know how Scotty and his friend Cooper flew from Ohio to England for just $18? ;-)

Carbon Capture

We all know how serious the threat of green house gases (GHG) these days is. There have been considerable discussions, awareness and activities worldwide to reduce carbon emissions and to look for alternate energy sources more actively. Many nations are planning to cut their carbon emissions or GHG emissions or try to offset them by purchasing carbon credit. One way to reduce carbon emissions is not to use fossil fuel like coke or oil. But the problem is for the industries to switch to alternate energies, it would take sometime (could really be a decade or more). This is not an immediate solution.

Few nations are trying for some alternate ways of reducing emissions. One such method is, CCS Carbon Capture and Storage. In this method, the carbon is captured at the source and pumped underground. Such a method is expected to reduce CO2 pollution by 40% according to oil major Shell. Ofcourse such a method can shoot two birds with one bullet. Shell is providing this services to companies that want to reduce carbon emissions. Shell makes money from these companies by helping them reduce carbon emissions and guess where do they pump this gas? They pump this gas into oil fields so that the oil that could not be extracted from the normal levels can now be extracted because due to the pressure created by CO2 in these oil fields, the oil levels raise above. :-)

Did you know series

Oflate I am getting lot of gyan. So, I thought of putting them in my blog under the theme 'Did you know?'. I will label them as 'Did you know'.