Don't worry, Economics At Work here!

Would have liked to post a longer note - exciting these times, but time also getting more dearer than petrol. I will make it as short and clear as possible.


Lets talk about Petrol first- I had been saying that we will never stop importing crude and therefore must prioritise that over Gold imports. Petrol price rise has been increased for number of reasons - Rising deficits, escalated rise in crude over the last few months, Rupee depreciation, and need to cut subsidy bills to give some relief to the Oil-marketing companies and also the import bill. This will continue to see rise, if you believe that crude oil prices will continue to be elevated over the coming years. The sooner you understand the economics of oil - the better our reconciliation with the reality, instead of raising ruckus over everything. Our politicians and sometimes, public dont realise that everything is not in the hands of government - your land prices and corruption deals, crony capitalism and MGNREGA schemes and Aarogyasri policies - may all be but eventually market forces will catch up with everything in life thats priced including the five elements - (air)gas, water, fire (energy), earth (sand) and sky (2G/3G).

Lets talk about Gold next. At current prices of gold prices in Rupees, if you invest now, and expect to make a return, beware.If international gold prices shoot up beyond the $1600 t/oz range and go back to $1800 levels and if Rupee appreciates back to Rs.50 to a USDollar, you make "zero" return. Current higher prices of Gold in India are due to Rupee depreciation. In any case, I am not yet done with my diatribe against Gold Merchants - so we will take that up separately. The Budget Bill hasn't cut customs duty but yielded to some other concessions.

Lets now talk about Sensex. At current levels of sensex, and Rupee-Dollar exchange levels, effectively, Sensex is literally trading at 12000-13000 thereabouts because of a 20% fall in Sensex and a 26% fall in Rupee exchange. Thats a colossal opportunity still. The less said, the better here.

Lets talk about the Rupee. There are more factors at work including the relationship between Euro/Dollar and Dollar/Commodities leading to a market decline in Rupee. Last Financial Year, we attracted $64 of NRI Remiitances - the highest in the world. I am sure everybody is watching even now. Similarly, if 50% of Corporate India hasn't hedged their dollars/euros, those in the export zone will make a bumper profit in the coming quarter. That should be good news. Besides, the RBI still has huge reserves to intervene - I am sure they have the smartest forex team in the world.

Lets examine facts and see things as they really should be seen. And for God's sake, lets understand how Economics really works in our lives. "Satyameva Jayate".

Gold Merchants of Venice?

Gold merchants are holding the entire country to ransom with their strike against FM's budget proposals to hike tax on import of gold, besides other taxing proposals on cash sales of gold over Rs.2 lacs etc.I feel the strike by Gold Merchants is irresponsible for many reasons. For centuries, these merchants have been fleecing the womenfolk with their bizarre methods of weighing,making charges, and under-billing and sometimes no billing ("Take "Estimate/Quotation" instead of bill madam"). Economics means looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. Most of the fallacies in economics are a result of ignoring this lesson. You look only at the immediate consequence of an act or proposal and then look at the consequences only for a particular group to the neglect of other groups. Gold Merchants are looking at only their self-interest and not at what the FM wants to re-direct priorities to from this measure.
Let's keep aside the fact that Gold Merchants are inherently incentivised to cheat public and the government for decades due to lax tax policies and innocent women who "have to" buy gold. From the government's point of view, Gold is an unproductive import. In 2000, we were importing around $ 4 Billion worth of gold. That same year we imported $ 15 Billion worth of crude oil. While I don't know what our GDP was in 2000, I have been tracking the corresponding figures over the years of various imports we do which were leading to inflated current account deficits. Last year or so, we have imported about $ 54 Billion worth of Gold and $ 154 Billion worth of crude oil. That means, at the current GDP of $ 1.50 Trillion, we are importing $ 154 Billion of Crude oil and using up our precious dollars for driving growth. This is happening at a time when per capita car consumption is around 6-7 cars per 1000 people. Imagine what will happen over the next five or eight or ten years as our GDP jumps to $ 3 Trillion or eventually $ 5 Trillion over the next 10 years. We need to continuously import Crude oil and maybe other commodities priced in dollars like Coal etc. to drive our infrastructure and overall growth in the economy. In one stroke, the Govt. has imposed import duty to drive home the hard truth that Gold is unproductive and need not burden our exchequer when we can't live without other crucial items like crude oil, coal, energy etc. The whole country should stand in one voice against the irresponsible Gold Traders for taking up cudgels against the government for their selfish motives. They are basically dishonest, don't pay taxes even on 30 per cent of the gold imported or 50 per cent of the gold sold to the retail households, cheat on the quality, branding of gold, underpay the labour, under-report cash sales, generate more black money adding to the present woes, and never give genuine discounts to the public. Its always been a fool's paradise for them now that they are making a picture as if government is the culprit. We need to coinserve every dollar we spend importing crude oil before its cascading effect on the GDP. We have already about $800 Billion Gold reserves in the country's households (excluding whatever reserves temple excavations reveal). Thats roughly Rs.4 lac crores.
Whereas for every dollar of crude oil we import, there is a multiplier effect and more importantly, economy moves. (Of course, there is huge wastage of crude oil in items of conspicuous consumption but lets's park it aside). I personally invest in Gold too on pressure from wife and mom but detest the large-scale immorality rampant in gold retailing shops. I am no Nagarjuna to shout on rooftops with megaphones on the malpractices but definitely feel its high time somebody rein in the gold merchants into the tax stream. Import Duty and the cash sale tax is a progressive measure in that direction. Gold, in any case, is an honorable exception to the law of demand and supply. Generally, if prices rise, demand drops. But Gold has aspirational value besides scarcity and is well counted as an exception to the law of demand (Its called "Giffin's Paradox"). So, what are the Mackenna's Gold Merchants worried about? Pay your bloody taxes and get on with the sales. Don't give lame excuses and avuncular laments.

Most Volatile Asset-Class in 2011?

Which is the most volatile asset-class in India? Not Gold/G-secs/Art. Not Equities even at 25pc.volatility or minus 24pc in 2011. Not Real Estate. Easy- Its Indian Cricket. You can lift world cup, trump team no.11, get trounced by teams below in 1 yr.