孟買證券交易所是整個亞洲交易所的元老，它又有世界第三大上市企業數量，約4700家上市公司。孟買證交所的位置位于印度孟買Dalal街。7月，股票市值的公司上市大約1兆7900億美元，已成為南亞最大的證券交易所和全球第十二大證券交易所。

 

Chapter 1: Introduction 簡介

Bombay Stock Exchange Sensitivity Index or BSE is a weighted index comprising of 30 stocks and started on 1-Jan-1986. It is also known as BSE Sensex. It is regarded as the pulse in the domestic markets in India. The BSE Sensex consists of 30 largest and actively traded stocks, also representatives of various industries and sectors. These companies combined account for approximately 50% of market capitalization of the BSE.

 

The Bombay Stock Exchange Limited (earlier, The Stock Exchange, Mumbai; popularly known as the Bombay Stock Exchange, or BSE) was the oldest of stock exchanges in the whole Asia and it is having the 3rd largest number of companies listed in the world, with approximately 4700 listed companies as of Sep 07. The location of the Bombay Stock exchange is located at the Dalal Street, Mumbai, India. In Dec 07, the stock market capitalization of all the companies listed on BSE was around US$ 1.79 trillion, with made it the largest stock exchange of south Asia and the 12th largest stock exchange globally.

 

With around 4700 Indian companies listed on the Sensex & around 7800 scripts on the exchange, it foresees a significant amount of trading volume. The Bombay Stock Exchange SENSEX (Sensitive index), is also popularly known as "BSE 30". It is majorly used stock market index of India. Though some exchanges existed, Bombay Stock Exchange and the National Stock Exchange (NSE) accounted for most of the trading of shares in India.

 

The housing burst in the United States had led to the sequence of economic repercussions on the United States which subsequently got transmitted to many other economies, engulfing many developed and emerging Economies. The shock originated from the housing sector affected the financial sector severely as many of the insurance and investment companies dealing with the real assets and Debts suffered financial losses on account of falling housing prices and loan defaults. The Losses dragged them to go bankrupt and closure of the business. The attention of the policy Makers got diverted from averting overheating of the world economies in the beginning of the 2007 to averting slowdown in the economies.

 

The financial crisis which originated from subprime mortgage in USA soon affected the entire world and stock markets world over crashed. Though in the initial stages of the crisis India was not much affected but as soon as the FIIs started withdrawing their money from Indian markets panic started and Indian markets which was showing a tremendous signs of rise soon started to fall, soon after the start of the financial crisis BSE (Bombay Stock Exchange) which was on the high of 21,000 points fell to its lowest levels of 7000 points.#p#分頁標題#e#

 

FII's (Foreign Institutional Investors) had been large buyers in the Indian market considering the scenario of last few years. They had also believed in the growth story of India in the past years. FII's had invested millions of dollars in Indian market and had bought the stocks of blue chip and growing companies. With the advent of United States Subprime and with its large impact on US financial players and many other companies, the great financial players of US got stuck with their bad debts. The companies went short of cash due to the increase in Non Performing Assets in their balance sheets. We have seen that in Subprime crises even big investment banks like Lehmann Brothers were unsuccessful in raising capital to save them from bankruptcy.

 

As the rule of thumb says that other assets are sold to meet the near term cash urgencies if you are not able to raise it by other means, same was applicable in the case of FII's that had invested heavily in Indian stock market. They started selling their holdings in the Indian market for making money out of it and meeting their near term cash requirements. With more FII's withdrawing their money from the Indian stock market, the supply of stocks increased manifold in comparison to their demand which led to the start of crash of the Sensex.

 

The major crash in the BSE Sensex began in the beginning of third week of January 2008. Earlier 9th January the Sensex was hovering around its highest mark of 21,800 but on the week beginning 21st January the Sensex crashed. In mere 2 days the Sensex had witnessed 4 circuit breakers with the crash of around 4000 points. That marked the beginning of down phase of the Sensex. Though many fundamental analysts were still apprehensive of the fact that Indian economy is strong in fundaments and it's a short term fall but most of the technical analysts believed that it's the beginning of Bear phase of Indian markets. Since then we have witnessed Sensex falling to even 7,500 level though some relief rallies at different points of times have allowed investors to make profit out of it. But talking about the current scenario though the Sensex is on the path of recovery but it has still not recovered from that phase and is hovering around 18,000.

 

Along with the investors, the next class of people to take the toll of falling markets was stock brokers. With the markets falling below the anticipated levels, the volumes of trading in the BSE squeezed to the large extent. With this the profit of the brokers also saw a sharp decline as they were unable to acquire new clients and their profit from existing client also decreased to a large extent. The retail investors had lost their hard earned money due to the market crash and many of them refrained from entering the stock market in the near future. Also, trading volume in all the segments and products in the market decreased. The retail investors drew their attention from high risk high return USP of financial market to fixed income securities and government securities to safeguard their capital. It was the period which saw an increase in the volume of debt funds and fixed income securities in the market. This dissertation tries to find out how the global financial crisis which shook off the world markets has affected the trading firms by taking into account Bombay Stock Exchange as case study whose benchmark index is known as Sensex.#p#分頁標題#e#

 

1.2 Statement of Problem

To find out the Impact of global financial crises on stock broking firms in India with reference to BSE Sensex.

1.3 Thesis Objectives

The purpose of my research is to study the impact of global financial crises in stock broking firms in India with reference to Bombay Stock Exchange.

 

It would be an exploratory research with the following objectives:

 

Understand the advent of global financial crises, with the advent of US subprime crises.

 

Understanding the effect of global financial crises on the different economies around the globe including India.

 

Emphasizing the effect of financial crises on stock trading on Indian stock market.

 

Based on the analysis, finding out the impact of global financial crises on stock broking firms in India with reference to BSE Sensex.

 

The descriptive nature of the topic would need much more emphasis on setting the context in the form of elaborate Introduction and critical analysis of the text. At the same time term Impact of financial crises which is used as the aim of the research will also be discussed to set a benchmark above which we can say that any broker had a significant impact due to global financial crises. Both primary and secondary research will be used to set this benchmark.

 

1.4 Preliminary Framework

1.4.1 Research Strategy and Methods of Data Collection

The Primary research method used for data collection will be a combination of Questionnaires and in-depth interviews. Self administered Questionnaires will contain a mix of close ended and open ended questions. In-depth interview will only have open ended questions.

 

Questionnaires will be vital to the entire study because it will form the foundation of the research. Close ended questions will make sure that I am getting all the specific information required to draw important conclusions. At the same time Open Ended questions will make sure respondent is able to give his or her insights on the research issues, which is of paramount importance in my research. Findings of Questionnaires will be supplemented with in-depth interviews which again are imperative looking at the descriptive nature of the topic. In-Depth interviews will be conducted for respondents who are higher up in the hierarchy to understanding and learn from their understanding of the whole picture. Their huge experience and vision will help in drawing important conclusions.

 

1.4.2 Sources of Data

Looking at the exploratory nature of the research huge amount of secondary data will be thoroughly studied. It will include studying of white papers and research papers on Global financial crises in General and its impact on BSE Sensex stock brokers in specific by various analysts and authors. This study would enable me to understand the underlying concepts of the impact of financial crisis on Indian stock broking business. Variables deriving businesses of the stock brokers will also be analyzed in order to relate with the bigger picture.#p#分頁標題#e#

 

At the same time Primary research will be used to further hone the understanding on the entire research topic. It forms the integral part of the whole study.

 

1.4.3 Access and Research Ethics

For secondary research there is a lot of material in public domain on this topic. Big companies like JP Morgan and DE Shaw and big management colleges like Howard and Warwick have white papers and research papers published which are available on the websites. Emerald Insight is a very good source to find more published research papers on this article.

 

When it comes to the Primary data collection it will be made sure that the topic of research is clearly conveyed to the respondents and their responses and identity will be kept confidential in all regards. In case of questionnaire ample time will be provided to the respondents to fill out the responses. Also option of not answering the question will be kept for some questions seeking some sensitive information. Also, with the help of my contacts in the organization I am sure that I will be able to access suitable people for my research.

 

1.4.4 Techniques for Analyzing and Interpreting Data

Both in depth interviews with open ended questions and Questionnaires with both open and close ended questions will be used to collect data.

 

The entire Interviews will be tape recorded and will then be converted into a written document. Important details about the respondent like Name, Designation, Major Job Responsibilities, Age, and Location will be recorded for internal use. To make sure information collected is specific questions will be kept specific with a clear aim to achieve desired objective. Coding technique will be used to analyse this qualitative data as it is effective technique of qualitative content analysis.

 

For the self administered questionnaire, close ended questions will be analyzed using basic statistical methods. Open ended questions will again be analyzed using coding technique.

 

"Researchers can develop codes only after some initial exploration of the data has taken place, using an immersion/ crystallisation or editing organising style. A common intermediate approach is when some initial codes are refined and modified during the analysis process." (Creswell, 2003)

 

Based on the coding of questionnaire, a descriptive model relating to the key variables underlying the impact of financial crises on stock broking business will be developed. Based on this model, an analysis will be undertaken and tested using data from questionnaire surveys different brokers and sub-brokers. Finally, findings on the analysis will be used for concluding the impact and suggesting changes required in the current scenario to neutralize the past impact.

 #p#分頁標題#e#

Chapter 2: Literature Review 文獻綜述

2.1 Introduction

The last decade has witnessed a see-saw ride in terms of growth and credit velocity within the US economy. The obvious response to the negative growth cycle is tightening of credit supply and lending criteria. According to Barron (2010) the demand for the money varies with the changes of the quantity of money in the market. However, the state of economy also plays an important part.

 

Recent extraordinary economic slowdown has changed the outlook of many of the stakeholders towards many of the economic issues including the developments in banking. In the light of the current financial turmoil it is interesting to investigate the pattern in the Credit cycle with respect to the economic scenario. This part of the study focuses on the previous research done in the same area. It tries to incorporate all the important points from different sources including Online Journals, Working Papers and Other online resources.

 

Firstly, it will put light on the relationship between the credit cycles vis-a-vis the economic cycle and then, it will try to investigate the main factors behind relating to the fluctuation in the bank finance. To further elaborate the issue it will also traverse through the behavioural characteristics of the banking institutions.

 

2.2 Relationship between Credit and Economic Cycles

During the modern history of banking, academicians have developed various statistical or mathematical models to calculate the risk involved with their lending decisions. These techniques are developed over time due to the reasons like the advancement in the technology and close analysis of business environment realities. But, irrespective of this the credit availability still gets influenced by the ongoing phase of the economic cycle. In fact, the financial markets see the changes in lending standards and a slow loan growth with the onset of recession (See Graph 1). Similarly, this tightening in the lending leads to the reduced or postponed spending (Lown and Morgan, 2006: 1575-1577). For this reason, the central banks and the governments accommodate their policies time to time to get the economy back on track. The uptick could be temporary but, it is usually meant for stabilising the market conditions and normalising the credit access (Barron, 2010).

 

In the research done by Kiyotaki et.al. (1997:211-212) one of the important finding was that, the small disruptions in money supply during the economic distress might amplify into the big shock on the different sectors of the economy. Therefore, it is not only the economic downturn which usually leads to tightening of financial conditions but, it can also be credit supply constraints leading to a deterioration in the overall climate of economy. In other words, the relationship between the credit and economic cycles are quiet complex and to a good degree they have interlocking effects on each other. So, economic disturbance can interrupt the financing conditions, in turn it can exacerbate the downturn and so on.#p#分頁標題#e#

 

Various studies done on banking structure and output fluctuations points to an important fact that, the total economic output is closely related to the credit supply and investment. The growth period observe heightened borrowing on liberal terms and this process results in highly leveraged borrower class (Gertler, 1988:559-561). For instance, Fisher (1933:341-342) introduced a debt deflation theory and raised an interesting point that, the extreme events like depression kick start the deleveraging process; therefore, the distress selling to pay off the debt results in the reduction of velocity of circulation of money and money and finally into bankruptcies. Altogether, all the previously mentioned changes culminated down into the hardening of real interest rates effectively. In short, the final outcome is the tightening in the credit cycle.

 

The relationship between the bank finance and the economic performance becomes more interesting in the case of SMEs. Here, the lending institutions see the available information and past relationship besides their credit history. Although, relationship lending generally reduces the information asymmetry as the banks accumulate information over time using the direct contact with the SMEs but, this does not completely avoid the risk of credit denial in course of serious economic problems. In other words, the financing decisions follow a typical pattern with respect to the economic performance (Berger et. al., 2002:F32).

 

2.3 Factors Influencing Credit Cycles

While examining the critical factors for the fluctuation in credit availability on the US economy, Calomiris et. al. (1989:429-431) argued that price shocks in the credit have produced far-reaching consequences for the output of economy. Furthermore, he found that an interruption in supply and demand in the overall economy bears a significant risk for the short term financing such as Commercial papers. This suggests that, dip in growth can result in the high level of price responsiveness and subsequently into a disturbance in the credit supply.

 

Again, the negative growth periods are generally followed by the deflationary environments and were accompanied by the rise in the agency cost. The increased agency cost was a direct after-effect of bad growth prospects and later resulted in the higher scrutiny in sanctioning a loan. For example, due to the implementation of deflationary monetary policies during the great depression, the risk premium and interest rate shot up vigorously in US (Hamilton, 1987:150-152). Similarly, DeLong et. al. (1984:1-4) forwarded an argument that, in the periods of economic shock the cost associated with the real interest rates happens to be higher as, the adjustment in nominal interest rates lags the economic output change. Also, they haven't found any strong evidence in support of the stabilising policies followed by the monetary institutions or the governments to prevent these credit cycles completely. Accordingly, the cost of financing is only affected to a degree by the policy response once the negative growth momentum sets in. At, the same time as the economy has traversed the twentieth century the volatility in the output and other macroeconomic factors has been reduced. Thus we can see that, the periods between economic growth and downturn witnessed a relatively lower alteration in banking parameters like interest rates, credit standards etc. That implies that, as the understanding about the economic policies enhanced by the research has lengthened the period of stability (Batini et. al., 2005:8-12).#p#分頁標題#e#

 

The empirical research by Balke (2000:1) in the area of interrelationship of economic activity and credit summarized that the monetary shocks in suppressed financial conditions have greater impact on the economy's output than in the normal conditions. Moreover, the positive Monetary policy impact is reasonably lesser than the retrenchment ones. Because of this the financing conditions in adverse monetary policy environment behaves as a propagator of economic shocks. However, the propagation of shocks through credit as a medium found to be non linear and eventually, depresses the availability of credit.

 

In case of the opaque borrowers, the weak hard information complemented by the accumulated soft information over time influences the decision of the banking institutions. The economic shocks effectively influence the lending decisions even in case of the relationship banking; due to the changes in regulatory environment such as capital requirements, preference to the alternative or less risky sources of revenue etc forces them to do so. In the same way, as the consolidation in the banking industry happens then, irrespective of the economic phase the banks turn to transaction lending (Berger et. al., 2002:F48-49). In that case, it has been noticed that the bank finance available to the SMEs or small borrowers get subjected to the new credit standards hence, their credit availability get altered.

 

Whereas in one of the bank capital specific research by Heuvel et.al. (2009) on the topic "The Bank Capital Channel of Monetary Policy" an important point regarding the lending by the banks has been highlighted in the background of their capital position. They underlined the assertion that, the new Basel accords implemented in 1988 has been somehow responsible for the credit crunch during the 1991 recession. However, in longer term these regulations have an overall positive effect on the balance sheets of the financial institutions.

 

2.4 Behavior of Banks and Credit Availability

There is very thin line between the differences between banks behaviour and many of the factors influencing banks behaviour however, it is interesting to note that the banking industry tends to follow a pattern in terms of its business conduct. Jiménez et. al. (2006:66) mentioned that the lending officers happens to be overconfident during the good times and are prone to mistakes in their lending decisions. This scenario is basically a result of over optimism regarding the repay capacity of the lender amid the economic boom. In addition, the liberal monetary environment aggravates the situation as it provides an artificial stimulus to the lending institutions in favour of following the loose credit standard policy. As a result, during the economic growth periods even the bad borrowers get access to the loans with relative ease and vice versa.

 

On the managerial side there are strong incentives for the managers to increase their lending targets in the middle of economic growth. These incentives might come from number of factors such as, increase in competition, aggressive policy implementation for capturing market or strong individual influence to over perform their peers. In light of these circumstances, the share of bank finance increases within the category of risky projects overlooking the potential problem of long term non performing loans (Rajan, 1994:399).#p#分頁標題#e#

 

Considering the dynamic nature of banking and borrowing setup within the business cycle, the internal pressure in the banking sector forces them to provide the finance to the firms on lower standards. Once the boom cycle ends, the retrenchment process starts; the sudden panic response from the side of banks takes them to other extreme. Consequently, the bank financing seems to lag the business cycle and follows it with a veiled but clear policy response (Rajan, 1994: 402).

 

2.5 Economic Cycle - US

In this section we will have a detailed analysis of how the US government is poised as of now and is in which stage of economic cycle.

 

There is more fiscal tightening in the US next year than in Europe (in net and gross amounts).

 

On the CBO estimates, fiscal tightening takes nearly 2.8% of GDP in 2011, with the required balancing of state and local government deficits being equivalent to another 1% of GDP. Our economists believe that the net fiscal tightening in 2011E will be 2.6% (as many of the tax cuts will they believe be renewed, especially the Bush tax cuts for people earning under $250K a year). This compares to fiscal tightening of 1% in Europe. Analysts also believe that the multiplier is higher in the US than Europe (as the tax cuts appear to have been spent and not saved, looking at the US savings ratio relative to the European savings ratio). If the Bush tax cuts are not renewed, then the fiscal tightening could take nearly 2% of GDP (relative to trend next year) and nearly 3% relative to 2010. The US has the worst combination of budget deficit and current account deficit of the major regions.

 

Clearly the current account deficit, if combined with a budget deficit, shows that the US bond market is being funded to a large degree by external capital.

 

The US savings ratio cannot fall from here. Our model of the US savings ratio suggests a fair value of 4%, in line with the latest reported figure in May. However, this is based on current bond yields, which are too low, in our view. A 4% bond yield, for example, would be consistent with a savings ratio of 4.5%. Recall the US savings ratio is now nearly a third of that of Europe. Indeed, we believe that underlying retail sales growth in the US, which in March has peaked at 14% on a 3-month annualized basis, will slow down to around 1.5% at best. Finally, there is the impact of the strong dollar on economic growth. Each 10% on the dollar trade-weighted takes 0.6% of GDP (with a lag of 12 months) and 4% off earnings (with around a third of US earnings coming from overseas). US banks have outperformed Continental European banks by 25% year-to-date. They are now trading on 1.4x tangible book value, compared to 1.2 xs for Continental European banks. On HOLT, they are pricing in a substantial rise in profitability, while European banks only require historical trough levels of profitability to justify current price levels, on analyst assumptions.#p#分頁標題#e#

 

2.5.1 Stage of the Cycle

Typically the US does well if there is a very sharp slowdown in global growth (with global lead indicators below 2% year-on-year), as the US tends to have less operational leverage as well as having the best micro policy response (Corporates cut costs quicker) and the best macro response (QE and if necessary fiscal easing) to slowing growth.

 

GDP was up 3.0% in Q1 2010, driven by a pickup in consumption, still positive contribution from inventories and business investment. With the fading effects of the fiscal stimulus and the heightened risks posed by the external environment, we expect GDP to moderate in the second half of this year and to return below 3% next year. Dragging unemployment and contained inflation indicate that the Federal Reserve will not hike rates before Q1 2011.

 

Recent economic releases reveal some mixed messages for the 2010 growth outlook. Increases to new home sales in March and April (+29.9% and 14.8% mom, respectively) following declines in January and February (-4.2% and -4.1%, respectively) were welcome surprises, but are not self-sustaining. They largely reflect the boost to sales before the April 30 deadline for the homebuyer tax credit. Values nevertheless continued to decline as the median new home non-seasonally adjusted price fell by 9.7% from $219,600 in March to $198,400 in April (-9.5% yoy). As anticipated, sales activity has been concentrated in the low- to mid-price ranges (where the tax credit is aimed). A sharp decline in mortgage purchase applications in May (-40%, to the lowest level since April 1997) points to a near-term decline in home sales ahead. The tepid signs of activity are further illustrated by sluggish private non residential and public construction expenditures. In the first four months of the year, construction spending declined 13.2% vs. the same period of last year. Weakness in the private non residential sector (-25% over the past year) will likely continue throughout 2010. Nevertheless, positive signals continue to come from the manufacturing sector - durable and nondurable goods posted their third consecutive quarterly increase in Q1, up 10.5% and 4.8% at an annual rate, respectively. Most important, the May ISM manufacturing survey overall index (down only 0.7pp to 59.7, and still close to its 25-year high) did not point to slowing growth in Q2. Note also that the ISM nonmanufacturing survey (at 55.4 in May, for the third month in a row) showed no sign of contagion from the volatility surge in financial markets.

 

2.5.2 Moderate and jobless recovery

Real GDP grew 3.0% in Q1 (Q/Q, annual rate), supported primarily by private consumption (+2.4pp) and inventories (+1.7pp), but offset by negative contributions from state and local government spending (-0.5pp) and net exports (-0.7pp). Final demand nevertheless posted a mere 1.4% increase (vs. 1.7% in Q4). While the possibility for additional stimulus is under discussion in Congress (unemployment benefits, funding for states, and tax and credit incentives for firms), and would have a small positive impact on growth in H2 2010 and H1 2011, fiscal policy will become a drag on growth in H2 2011 due to waning stimulus, spending cuts by states and phasing out of the 2001 and 2003 tax cuts. Analyst forecast a 3.2% increase in GDP in 2010, and a more modest 2.6% in 2011. Residential investment, a key driver of growth in the aftermath of previous recessions, remains a weak spot in recovery so far. The still large supply of housing inventories coupled with weak demand could weigh against a more notable rebound of residential investment, putting pressure on the housing sector and home prices for much of 2010, as the withdrawal of government support to housing takes its effect.#p#分頁標題#e#

 

Furthermore, the contraction in non-residential structures continues to be a significant drag on business fixed investment, particularly in H1 2010. Surveys of the small business sector show that firms continue to face weak demand conditions, and the delay in firms' capex plans has kept demand for credit at bay. As investment picks up, credit supply could be a constraint. Even though subdued investment and consumer spending will cause imports to remain contained, the contribution to growth from trade will remain largely flat in 2010, particularly in light of recent international developments (fiscal tightening in the Eurozone will both weigh directly on US exports to the region and indirectly via a stronger USD). The U.S consumer has shown greater-than-expected resilience in Q1 2010, though strong spending gains in March were followed by a slowdown in April and May. Recent payroll data has, however, been disappointing. Private-sector employment rose by a mere 41,000 (140,000 per month for the past three months). While the unemployment rate fell to 9.7% (from 9.9% in April), the labour force shrank by 322,000 workers, reducing the participation rate by 0.2 percentage points. The broader measure of unemployment ("U-6") rose to 17.1% in April, underscoring the fact that there is still ample slack in the labour market (part-time workers and discouraged workers). A sustained decline in the unemployment rate is unlikely before Q1 2011. Employment weakness will keep household income growth sluggish.

 

2.5.3 Analysis- Lets Merge Economic Cycle with credit Cycle in USA

The latest Fed statements confirm that the zero-interest rate policy is likely to be maintained for an "extended" period of time. Moderate recovery, large slack in the economy and absence of inflationary pressures support this view. That said, the Fed is clearly winding down its crisis-fighting policies. Various financing facilities were shut down in early February and March. Direct bond purchases are suspended. Meanwhile, the discount rate was raised by 25bp on February 18 to 0.75%, or a 50bp difference with the Fed Funds target rate (vs. 100bp prior to the crisis). The Fed has opted for a three-phase exit strategy: the 1st, nearly completed, consisted of shutting down financing facilities and credit support mechanisms; the 2nd, the drying up of excess bank liquidity in surplus reserves, is underway with the progressive normalisation of the marginal loan facility, which will be followed by liquidity-fixing operations; the 3rd, the hike in the fed funds target rate, will come later and not until the recovery in activity and employment is more solidly established.

 

The Fed has indicated an intention to eventually return its balance sheet to a more normal Treasuries-only composition. Eventually, as the economy strengthens, the nearly $1 trillion in excess reserves will need to be absorbed through asset sales. However, as credit growth continues to contract, the Fed is unlikely resort to asset sales in the near term.#p#分頁標題#e#

 

State and local government finances have been under pressure since FY2009 due to the combination of decreased tax receipts and greater spending demands under Medicare and other benefits amid the economic slowdown. Shortfalls reached $110 billion in 2009 and are expected to rise to $200 billion in 2010. Recovery Act funds will have been mostly spent by October, declining by $45 billion in FY2011, equal to a reduction of 3.5% of state and local tax receipts.

 

Payroll employment has yet to adjust at the state and local level when compared to private payrolls. Furthermore, states face unfunded pension liabilities estimated at $1 trillion. How fiscal gaps are addressed going forward, in the absence of additional federal funding, could have implications for state and local economic activity and thus on national GDP growth.

 

First, in the case of the US economy, the recovery momentum for overall economic indicators has weakened, and as it may be difficult to enter a recovery trajectory without government support, the US government is expected to lay out measures to resolve the current economic conditions. However, as expectations over the 3Q US economy have become more realistic, concerns over the economic slowdown should ease. Current concerns over the global economic slowdown mainly stem from conditions in the US and China. Therefore, economic conditions in the two countries need to be observed in order to determine whether global economic slowdown worries will become a dominant issue or whether they will come to an end in 2H. (Bureau of Economic Analysis, 2010).

 

Overall US economic recovery momentum has weakened. Therefore, based only on economic indicators, it is difficult to find signs that the US economy is turning around. Employment fell amidst a downturn in the manufacturing economy. And, consumer sentiment and household consumption have contracted due to the slump in the employment market. In addition, the continued deleveraging of households as savings rates go up is also burdening a flexible consumption recovery. Following the end of the government's real estate support tax, the real estate market has also lost momentum and is contracting. US economic index trends suggest it will be difficult for the US's economic recovery to turn around unassisted. Therefore, it is safe to say that the return to a recovery trajectory will solely depend on government policy. Accordingly, analyst believes the US government's choices will be vital in forecasting the direction of the US economy.

 

However, as expectations over the 3Q US economy have become more realistic, concerns over the economic slowdown should ease. Current concerns over the global economic slowdown mainly stem from conditions in the US and China. Therefore, economic conditions in the two countries need to be observed in order to determine whether global economic slowdown worries will become a dominant issue or whether they will come to an end in 2H.#p#分頁標題#e#

 

We expect the US government to carry out further stimulus packages. In fact, the Fed decided to sustain the low interest-rate environment for an extended period and continue quantitative easing (reinvesting proceeds from the matured MBSs in treasuries) at its August meeting, signalling a shift in its policy stance (it discussed a reduction in quantitative easing a few months ago).

 

In addition, inflationary pressure remains low in the US, making further quantitative easing more likely. While emerging nations started to raise their key rates due to rising inflationary pressure amid sharp economic recovery and a need to collect liquidity, the US has seen little inflationary fear due to low resource utilization and weak employment. Accordingly, it is believed that there is further room for the US to expand liquidity injections. As such, while remaining cautious over the possibility of Fed actions should the US economy deteriorate further, analyst still believe additional stimulus packages will fade concerns over an economic slowdown. Meanwhile, believe that expectations for a US economic recovery will become more realistic in 3Q. Hopes were widespread that the economy would grow sharply, as GDP expanded 3.5% y-y in 1Q, vs. a 2000~2007 average of 2.5%.

 

Now that the economy is unlikely to overcome the negative impact of the financial crises, the excessive optimism should fade, easing fears of a massive negative impact from a global economic slowdown at the same time.

 

2.6 The Indian Story

2.6.1 Key Takeaways

Core essence: Where there is political will, there is a way; where there is no will, there is a survey!

 

On politics & development

Good politics is also good economics. According to Food Commissioner, NC Saxena's Committee Report (released in mid-2009), 50% of the Indian population earns less than US$1 per day and almost 90% earns less than US$2 per day. Unless development uplifts the lives of these people, it cannot be called real and sustainable development.

 

If more and more people are given education and jobs, they will turn consumers, in turn leading to GDP growth and sustained growth in stock markets, as well. Increasingly, there is a need for an integrated approach, including a strong public-private partnership. The government should leave most of the business in private hands, and step in only in those projects where returns are not adequate for commercial activity.

 

On need for innovation

Innovation is the key solution to many problems of development. Example - toll fees for the Bandra-Worli sea link can be securitized to fund the equity portion of extending the sea link from Worli to Nariman Point. The expected toll on this can be further securitized to fund the next project, and so on. Similarly, in Mumbai, huge quantity of sewage water is released into the seas, causing pollution. Instead, such sewage water can be treated and supplied to power plants, conserving water resources and also protecting the environment. Innovation can be applied anywhere e.g. people are more than willing to pay for a helicopter service connecting religious places in difficult terrains such as Badrinath, Kedarnath, Hrishikesh, etc.#p#分頁標題#e#

 

On infrastructure as a key driver of development

Infrastructure projects such as power, roads (including rural roads), irrigation and cold chains are critical to development, as they generate employment and also deliver economic value. In power, there should be high thrust on hydro and solar power. Instead, the present government seems keen on nuclear power, where the cost of generation is unviable. Irrigation needs to be moved from the state list to the concurrent list, so that central funds can also come in and projects will not be stalled or reduced in scope for want of resources.

 

Projects like interlinking of rivers need to be pursued vigorously for effective water management at the national level.

 

Key Takeaways

Core essence: By 2020, Rural India will be a US$1 trillion economy, larger than today's Canada or South Korea. This will throw up opportunities across businesses.

 

Insightful glimpses of Rural India

Rural India is the real bull's eye of the Indian growth story. Rural India accounts for 70% of population, 56% of income, and 64% of expenditure and 33% of India's savings. Also, it accounts for 60% of FMCG sales, 50% of TV set sales, and 40% of two-wheeler sales. Despite urbanization, 65% of India's population would continue to live in villages. Proper roads now connect 80% of Rural India, which accounts for 90% of the rural population and 95% of rural wealth. Tele-density has improved from 5% to 21% in five years and is expected to go up to 50% by 2012. Almost all villages now have electricity; 60% of rural households (70% of rural wealth) have electricity. At present, 70% of the rural population is literate; by 2020, there would be ~100% literacy.

 

There are ~87 million Kisan Credit Cards in rural India, which is larger than all the debit and credit cards of Urban India. At present, 45% in Rural India earn more than US$1/day - the figure is expected to go up to 58% in 2020. In Rural India, the seemingly low income of US$2-3/day is actually high, as there is no rent (most people own houses, however modest) and education, health, etc is provided almost free by the Indian government. Thus, even on lowly income levels, purchasing power in Rural India is high.

 

Key drivers of rural resurgence and their impact

Significant increase in minimum support price of grain (100% increase in 10 years; input costs have increased only by 50%). Through NREGS (National Rural Employment Guarantee Scheme), 44 million people have been given employment; the program has also given regularity to rural income. Multiplicity, i.e. multiple earnings streams for rural people has added to the income. In terms of share of wallet, food constituted 58% of the consumption basket in 2000, which is down to 43% now and would go down to 33% by 2020, the same as Urban India today. This suggests meaningful increase in discretionary spend.#p#分頁標題#e#