Thursday, April 24, 2014

How deleveraging affects economy

This article was first published in the business section of www.rediff.com on April 23, 2014; Co-Author: Khemchand H. Sakaldeepi

In the first article in the series of understanding how the economic machinery works, we introduced transactions, credit, interest rates and inflation (the article can be read here). In the second article, we dealt with the importance of credit and introduced deleveraging (the article can be read here).  In this part (third), we will delve into the impact of deleveraging and introduce fiscal deficit and quantitative easing. The concluding part would weave all the different parts of the economic machinery together to help the readers take a view on the current economic scenario in India.

Impact of deleveraging
In the previous articles we saw that deleveraging happens when the rate of increase in debt outpaces the rate of growth of income. Incomes fall, people and organizations cut spending or austerity measures are taken up, such as projects halt, pay cuts for employees, bonuses come down and unemployment increases.

Asset prices drop, credit disappears, stock market falls, the banks try to reduce debt – restructuring of debt, writing off defaults, deposits into banks fall and default rate goes up.

Then the government tries to redistribute wealth by increasing its spending for generating employment. The spending of the government more often is larger than the income in such scenarios. This creates fiscal deficits.
During deleveraging the income falls more than reduction in debt due to the austerity measures. This is deflationary and painful. It may even lead to an extreme case of recession, also known as depression. This is a classic case that has repeated many times in history. For example, even Hitler came to power because of the social disharmony created by depression.

In such scenarios, many economies resort to printing more money. The central bank buys financial assets from the government, who in turn engages in spending to generate employment and lift demand. This is called quantitative easing.

Printing money has an impact on the exchange rate as the supply of currency being printed increases in the market.

The central bank must play very safe and must strike a balance such that the income growth is larger than the rate of growth of debt. Once deleveraging begins, going back to the boom periods usually takes 7-10 years. Hence, it is called “the lost decade”.












Source: http://planningcommission.nic.in/data/datatable/1612/table_23.pdf

The debt to GDP ratio of India stood at around 68 percent in 2013. While this ratio is much lower than in countries like US and many European nations, the interest payments and principal repayments make India very vulnerable. The fiscal deficit of India has been on the rise since 2008 and reached alarming levels in 2011-12.

This also had an impact on the exchange rate. The Indian rupee started to depreciate again the dollar as the fiscal deficit widened, the GDP growth rate started to come down, and inflation was at an all time high. The flight to a safer currency (US Dollar) meant that the Indian currency depreciated. This caused great deal of concern to importers as their imports, which are often priced in US Dollars, became more expensive in terms of Indian rupees.


In fact, The Indian economy has an underground economy, with an alleged 2006 report by the Swiss Bankers Association suggesting India topped the worldwide list for black money with almost $1,456 billion stashed in Swiss banks. We are not only a rich country, but we can actually take on more debt if we had that money in India and really wipe the tears off every citizen and more. 

The above is a pretty complex but easy to understand story of how the economic machine works. We as citizens often get lost because we look at things at the microcosmic level and hence react emotionally. But if we were to see the big picture then we can play really smart in more ways than one. 

In the next piece we shall delve deeper into the state of the Indian economy currently and the uphill task the next occupants of the North Block face.

Friday, April 11, 2014

What do a PhD scholar and an entrepreneur have in common?

This article was first published in www.yourstory.com on April 11, 2014
http://yourstory.com/2014/04/phd-scholar-entrepreneur/

I am a PhD in finance with a stable job and the assurance of a fixed expected salary every month. My husband is an entrepreneur, and worries daily about weather, inventory and changing prices. To use a cliché, we are as different as chalk and cheese.

Yet, there is something that binds us. Our journeys. His journey comprised of leaving a comfortable job and creating something of his own. Mine comprised of devoting about six years of my life to doing a PhD, after having already spent 19-20 years studying.

While doing a PhD is not often compared to being an entrepreneur, there are more comparisons than meets the eyes.

The investment in terms of time and the opportunity cost of not taking up (or leaving) a job is huge as the stipend paid to a PhD student is far below what he or she would earn by working in the industry, just as the first few years of an entrepreneur is spent thinking about every penny. On top of it, the horror tales of endless hours one has to put in, the ever shifting finishing line, and the failures dissuade many from taking up a PhD program, just as the same reasons prevent many from leaving their jobs.

There are many who take up a PhD program but abandon it midways. Excessive reading, long hours, low pay, when other batch mates from graduation and post graduation days go for long foreign holidays and eat at expensive places, wear expensive clothes, it keeps reminding you of the life that you could have had! Sure enough, I keep reminding my husband of all the foreign vacations that we could have had!

Then there are others who take it up and stick to it till they finish. Once they decide to stick to the program, it does not take long for them to realize that they have made an investment which would change the way they think forever. The key is of course to get into a good PhD program which gives you rigorous training. A startup’s story is pretty much the same. Once it survives a few years, the chances of its success are high.

The coursework in a PhD program intellectually stimulates, teaches one to learn beyond the superficial and to dig below the surface. An entrepreneur goes beyond the theory and thinks out of the box to reach its customers. He must always innovate and improvise.

Next comes the periods of independent study. Most of the PhD programs have long periods of independent study, where the candidate is given time to read, formulate the hypothesis, review the literature etc. It is easy to keep postponing all this as there may not be anyone watching or asking for progress at frequent intervals. Discipline and self-motivation is the key here. Without discipline, one may take eight to nine or may be more years to complete their thesis.

When I complain about the long hours that my husband spends in the office, his reply is usually, “if I don’t do it, who will?” Since an entrepreneur is his own boss, spending that extra hour in the office takes a lot of motivation.

An important milestone is getting the proposal ready. Curiosity to find something, to discover something new, or to fill an important gap in the existing body of literature results in a good defendable proposal. Some people are born curious but others acquire the curiosity when they repeatedly read about a single topic and related work. Similarly, for the entrepreneur, that first product or the first order is the most important milestone. It can be the defining moment for the venture.

The process of writing a thesis is actually a process of self discovery. The journey itself seems like the destination. The quest for accuracy, for measurement and deduction, the single minded pursuit of data collection, learning to write and run codes (which have become an integral part of doing a PhD now a days) which one earlier thought one was never capable of doing, are all activities which stretch the boundaries of learning.

An entrepreneur also discovers that while his core competency might be marketing or finance, he is an office boy to a CEO, an accountant to a strategist, all rolled into one.

Then comes the stage where the comments of the supervisors, advisors and friends start coming in. Incorporating changes and going through the drafts of the thesis numerous times needs patience. There is no choice. If one does not have this trait, they simply have to acquire it, just like an entrepreneur keeps revising his product and strategies as the business progresses.

When the thesis is submitted after all the years of hard work, the feeling is unbeatable. The defense of the thesis and the award of the degree is the stepping stone to a career in academics and lifelong learning. Similarly, when a venture succeeds, it brings immense joy and wealth to the entrepreneur.

So, if you are passionate about something, either do a PhD in it or become an entrepreneur with a venture revolving around your passion!