Should Greece Stay Euro or go Drachma

The recent Mac-Von debate: "Should Greece stay in Eurozone or move out" had the teams battling out to prove their point. Let’s see what each one had to say:

Amrutha Ghali & Akansha Mintri: Greece should move out of EU

The Austerity measures on Greece are

•     Increasing taxes-imposition of a national, regressive, property tax on homeowners

•     Reducing benefits (pension payments etc.). Downward pressure on wages and price

•   Effect on the public health service-suspended payments to EOPPY, on which pharmacists rely for funding to prescribe drugs.

Because of this,

•  Greece will be stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression.

•    No growth, no productivity, rising unemployment in Greece

•    Cutting deficits will reduce demand

•    Price deflation  will increase the real value of debt and will further increase current account deficit

•   Greece already has an official unemployment rate of 16% and fall in GDP is 7% per year, so further unemployment and falling incomes will effect democracy. Even if Greece agrees to stay back-continued borrowing is needed to finance its current account imbalance. So the core countries need to fund it. Even if Germany formalizes transfer of funds, it will demand further decline in wages and incomes that will lead to severe political tensions between Germany and Greece.

Abandoning the euro now and creating a new drachma would permit a devaluation and a default that might involve much less economic pain than the current course. The value of the new drachma would fall relative to the euro, automatically reducing real wages and increasing Greek competiveness without requiring Greece to go through a long and painful period of high unemployment. Instead, the lower value of the Greek currency would stimulate exports and a shift from imports to domestic goods and services.

Siddharth Jaiswal & Abhishek Sethi: Greece should stay with EU

Greece has taken some significant steps towards getting its public finances back on track but clearly much more is needed. The fact that the country is in a deep recession and that this effort is based almost exclusively on reducing public spending and increasing revenues through greater indirect taxation has placed a very heavy burden on most Greeks. The social impact of the crisis is reflected in the record unemployment rate, the closure of shops and businesses, and an increasing number of people facing social exclusion. 

 

•      As the government embarks on a new round of austerity measures, it is clear that an effort will have to be made to keep the majority of the public on board. Greece and its partners will have to pay particular attention to introducing a sense of burden sharing and fairness with regard to taxation; presenting a coherent vision of how the public sector can be reformed to become more modern and efficient and not just cheaper and smaller; and dispelling some of the stereotypes that are unfairly damaging Greece’s image and feeding scepticism domestically and across Europe.

Following observations are a proof that Greece is on its way to recovery  

• Budget numbers are on track to meet its fiscal consolidation targets (Budget deficit narrowed by 40 %). Greece is complied with all the fiscal measures and transparency on the implementation has been increased.
• The Parliament passed the key pension reform bill at the beginning of July.
• Better political support for the next drive of austerity measures.
• Government’s cash deficit fell from 19 Bn Euro to 11 Bn Euro and the budget’s primary deficit narrowed to 5 Bn Euro from 12 Bn Euro.
• Greek parliament passed the new tax bill which includes
• Unified progressive tax scale for personal income.
• Three year tax exemption period for new businesses.
• Various other taxation measures for capital and real estate and business income.

Liquidity condition of Banks (Stress Test) indicates that the bank’s solvency buffer remains adequate, with some erosion.EMU exposure to Greece is significant, European bank holding large amount of Greek Government Debt, this suggest that there is a strong incentive for the euro area to avoid a restructuring or a default.

 

Post your comments if you agree or disagree to any of the opinions/facts mentioned above.   

     

Myths about poverty lines (Source TOI 30th March 2012)

By the sheer loudness of their protests, NGOs, journalists and intellectuals have bamboozled the prime minister into withdrawing the latest Planning Commission report. The report had shown accelerated poverty reduction, a perfectly plausible outcome in view of accelerated growth since 2003-04. But the critics are not happy that India is succeeding in combating destitution. They therefore tirelessly invent myths to muddy the discourse. If we are to avoid costly policy mistakes, we must expose these myths for what they are.

The first myth is that the Planning Commission plays fast and loose with poverty lines. This myth, endlessly repeated in the media, is an insult to the country's finest tradition of letting professionalism rule without any political interference whatsoever in setting the poverty lines. According to Professor T N Srinivasan, arguably the world's top living expert on poverty, the history of poverty lines in India goes as far back as 1876. That year, Dadabhai Naoroji provided the first set of poverty lines for various regions of India in a paper entitled 'Poverty of India'.

The official poverty lines we have used in recent decades were based entirely on the recommendations of the Lakdawala committee of 1993. Not only was Lakdawala himself a leading scholar of poverty, he also stood on the broad shoulders of such stalwarts as Pitamber Pant, once handpicked by Prime Minister Jawaharlal Nehru to head the Perspective Planning Division of the Planning Commission, and V M Dandekar and Nilakant Rath, both pioneering scholars of poverty in post-independence India. In a nutshell, these poverty lines had been set such that anyone above them would be able to afford 2,400 and 2,100 calories worth of consumption in rural and urban areas respectively, in addition to subsistence level of clothing and shelter.

A committee headed by the late professor Suresh Tendulkar was likewise behind the latest revisions to the Lakda-wala poverty lines that the Planning Commission reported to the Supreme Court last year and also used to derive the number of poor in the report just withdrawn. The integrity and qualifications of Tendulkar are beyond reproach.

The second myth is that the Planning Commission has time and again lowered the poverty lines to make exaggerated claims of poverty reduction. The truth is exactly the opposite. The Tendulkar committee recommended raising the rural poverty line while keeping the urban poverty line at its previous level and the Planning Commission fully complied with that recommendation. After extensive consultation and careful analysis, Tendulkar reached the conclusion that while those living above the Lakdawala urban poverty line continued to be able to afford 2,100 calories, the rural poverty line needed upward adjustment so as to be aligned to its urban counterpart.

Yet, those who have followed the debate subsequent to the Supreme Court filing by the Planning Commission would recall that the uniform impression from media reports was that the commission had lowered the poverty lines. This same impression has been conveyed yet again in the wake of the latest poverty report. For instance, a headline on a major tele- vision channel website states, 'Planning Commission further lowers the [urban] poverty line to Rs 28 [from Rs 32 in the Sup-reme Court filing]'. But, once again, the Planning Commission had done no such thing. The Rs 32 line relates to the year 2010-11 and Rs 28 to 2009-10, with the difference fully accounted for by the higher price level in 2010-11.

The third myth is that the Planning Commission has nevertheless set the poverty lines so low that they threaten to exclude many from benefit-ing from redistribution programmes. The guiding objective behind the poverty line has always been to monitor progress in combating destitution. Therefore, poverty line expenditures have been traditionally set at levels just sufficient to allow above-subsistence existence.

Rather than argue in the abstract what Rs 28 would or would not buy at 2009-10 prices, critics need to concretely analyse the basket of goods that those living on this expenditure actually bought in 2009-10. If they can convincingly argue that contrary to the judgment of Tendulkar, that basket leaves its consumers in destitution, they would have a case. This they have not done.

Drastic upward revisions of the poverty line as suggested by many, especially on the instant Twitter polls that TV channels love to conduct these days, are downright silly.

Suppose we raise the rural poverty line to Rs 80 and the urban one to Rs 100 at 2009-10 prices. What would these lines do?

First, they would designate 95% of the rural population and 85% of the urban population poor. Does anyone believe that all but the top 15% of the urban and 5% of the rural population live in destitution today?

Second, how much good to the bottom 30 or 40% who represent the truly destitute will we do if the tax revenues raised from the top 15% urban population were spread evenly over 95% of the rural and 85% of the urban population?

And finally, suppose we could magically redistribute all expenditures in 2009-10 equally across the population. What do you think this will give each individual? Do not be shocked to hear the answer: barely Rs 41 per day in 2009-10! Everyone would drop well below even the lowest poverty line any critic of the Planning Commission has advocated to date!

fiscal deficit estimates, unconvincing, Budget 2012

The Budget was expected to make some credible fiscal correction and lay out a clear roadmap for fiscal consolidation. It is now accepted that fiscal consolidation has suffered a setback. This article looks into the creative accounting in fiscal correction and the setback to monetary-fiscal co-ordination.

The process has been revenue-led, with little expenditure rationalisation (see table).

Deficit correction has been envisaged through increase in indirect taxes — mainly service tax, and non-tax revenues (primarily through sale of telecom licences). Expenditure cutbacks are expected to come about through reduction of major subsidies. The reliance on indirect taxes has inflationary potential.

There is no evidence of expenditure rationalisation in the Budget, except for the proposed amendment to the introduction of a Medium Term Expenditure Framework. However, the efficacy of such a policy measure (considering that the next Budget will be a pre-election one) seems open to doubt.

CONTINUED FISCAL SLIPPAGE

Deficit targets will once again not be met. The year 2012-13, compared with 2011-12, is not expected to see any dramatic changes in economic growth on the domestic or global front. Growth and fiscal outcomes will be similar, except for some improvements on the revenue side (taxation).

To maintain the budgeted deficit numbers, the government will resort to cutbacks in Plan expenditure, leading to reduction in developmental expenditure.

In addition, on account of market uncertainties, disinvestment proceeds may not be fully realised. Keeping in view the past years' experience of sale of telecom licenses, the amount expected to be raised this time around looks over-optimistic. The budgeted fiscal deficit at 5.1 per cent may slip further to 5.5 per cent of GDP.

The golden rule for deficit correction is to eliminate the revenue deficit. The Budget for 2012-13 proposed to amend the Fiscal Responsibility and Budget Management (FRBM) Act by giving statutory recognition to the concept of “Effective Revenue Deficit” (Revenue deficit less grants given to States for creation of capital assets). Paragraph 12-14 (page 20) of Fiscal Policy Strategy Statement justifies the use of Effective Revenue Deficit (ERD).

The 13th Finance Commission in its report in paragraphs 9.20-9.25 recognised the definitional refinements in respect of revenue deficit and grants for creation of assets as capital grants. However, in paragraph 9.24 (page 130) of its report, it has clearly mentioned that it would be appropriate to continue with the existing classification of expenditure as revenue or capital and that it cannot be disturbed in an ad hoc manner.

Thus, the claim of Budget 2012-13 that zeroing of ERD tantamounts to elimination of revenue deficit is a reflection of creative accounting.

MONETARY OPTIONS REDUCED

Financing of the fiscal deficit reveals the following. First, during 2011-12, there was higher recourse to short-term borrowings (91,182 and 364 day treasury bills) to the extent of Rs 1,16,084 crore as against the budget estimate of Rs 15,000 crore.

This implies that during 2012-13, there will be greater pressure on the short-term interest rates on account of higher borrowings to repay these treasury bills.

Second, the gross market borrowings during 2012-13 would be around 5.6 per cent of GDP (Rs 5,69,616 crores). Such a high level of market borrowing would put adverse pressure on monetary, liquidity and debt management. Third, even though the budget estimate assumes zero net Ways and Means Advances (WMA) from the RBI, in the event of continuation of tight liquidity conditions, the recourse to WMA is inevitable. This development would further aggravate the problems of monetary management. With such fiscal pressure, there is no manoeuvrability left with the RBI for a policy (repo) rate reduction.

Securities issued against small savings as a financing item of fiscal deficit are budgeted at Rs 1,198 crore, against an outflow of Rs 10,302 crore. This implies that small savings is losing its importance as a financial savings instrument. The National Small Savings Fund (NSSF) is budgeted to have a loss of Rs 7,117 crores in 2012-13 on top of a loss of Rs 6,233 crores in 2011-12 and a loss of Rs 12,706 in 2010-11.

The accrued income has fallen short of expenditure on account of higher interest payments and management costs. This has occurred despite a reduction in agent commissions. The proposed Rajiv Gandhi Equity Savings Scheme with tax incentives would have adverse implication for small savings as the tax exemption would entice savers.

Our FRBM experience for the last 8 years has been in the nature of an unkept promise. Therefore it is appropriate that an Independent Review and Monitoring of the implementation of FRBM process be instituted in the form of a fiscal council. This would add to the integrity and effectiveness of the Budget.

BY Dr. R. K. PATTNAIK  & Dr.ARCHANA PILLAI

10 things to know about Mahindra Satyam, Tech Mahindra merger

Mahindra Satyam and Tech Mahindra are likely to announce a merger plan today. The move was widely expected. In January, Mahindra Satyam Chairman Vineet Nayyar had said that the two firms would merge by the end of this year. The Mahindra name is likely to be retained in the combined entity.

Tech Mahindra had acquired the scam-hit Satyam Computer Services in 2010 and re-branded it as Mahindra Satyam with the eventual goal of merging the two firms. In January 2009, erstwhile Satyam Computer’s founder and then Chairman B Ramalinga Raju had admitted to fudging account books to the tune of thousands of crores of rupees.

The most important factor to watch for markets would be the swap ratio, which is the ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. On the basis of the current market prices where the shares of Mahindra Satyam and Tech Mahindra are trading, the likely swap ratio appears to be close to 9:1. That is, 1 share of Tech Mahindra will be issued for every 9 shares of Mahindra Satyam.

Here are 10 things to know before the announcement is made.

1. The boards of Tech Mahindra & Mahindra Satyam will meet today to finalise the merger plans for the two technology ventures. In a statement to the Bombay Stock Exchange Mahindra Satyam said, "Satyam Computer Services Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on March 21, 2012, inter alia, to consider the Amalgamation of the Company with Tech Mahindra Limited..."

2. Shares of both companies traded higher ahead of the board meeting. At 0918 hours, Tech Mahindra stocks rose nearly 2.5% higher on the BSE at Rs 664. Shares of Mahindra Satyam jumped 2.2% at Rs 75.80. The BSE Sensex gained 0.2% or 33.47 points at 17,349.

3. Implications: The combined entity will have revenues of $2.7 billion. The combined entity will become 5th largest IT company in terms of market cap. British Telecom, which contributes 35% of revenue, will contribute only 16% of revenue in the merged entity. Exposure to telecom verticals will reduce to 55-60% against 100% currently. The combined entity will create a diversified company in terms of geographical reach. The merged entity will have a net cash of Rs 1,500 crore on its books against a net debt of Rs 1,100 crore currently. The earnings per share of the merged entity would be Rs 79 per share.

4. The market will be keenly watching the nuances of the merger structure and swap ration between Mahindra Satyam and Tech Mahindra. Possible scenarios: (a) Tech Mahindra buys Mahindra Satyam, or (b) Mahindra Satyam buys Tech Mahindra, or (c) Merger between Tech Mahindra and Mahindra Satyam. Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited says Tech Mahindra will buy Mahindra Satyam in all likelihood.

5. Swap Ratio of the merger will be the most important factor: The swap ratio can be based on different bases such as net worth, EPS (earnings per share), market price, etc.

6. Irrespective of the swap ratio, the impact on the promoter group 'Mahindras' will be limited, as they hold virtually similar percentage of stake in both the entities. That is, they hold about 42.65% stake in Mahindra Satyam and 47.65% stake in Tech Mahindra. However, any swap ratio in favour of Tech Mahindra may prove to be slightly better for 'Mahindra' group.

7. Any swap ratio close to 9:1 will make the merger transaction "market-price" neutral, which means that there may not be any arbitrage opportunity left for the shareholders of both the companies. "However, the swap ratio close to 9:1 appears to be "value" decretive for the shareholders of Mahindra Satyam and "value" accretive for the shareholders of Tech Mahindra, Thunuguntla said.

8. If the final swap ratio is close to 9:1, then the combined entity will be having the market cap to the tune of about Rs 17,000 crore.

9. If the final swap ratio is close to 9:1, then the current Mahindra Satyam shareholders will hold about 51% in the combined entity and the Tech Mahindra shareholders will hold about 49% in the combined entity.

10. British Telecom, other promoter of Tech Mahindra, will be closely watching this space as they hold about 23.20% stake in Tech Mahindra. If the swap ratio is 9:1, then British Telecom will hold about 11.44% stake in the combined entity.

(With inputs from SMC Global Securities Limited note on the merger)

Cheers Future Mangers: No effect of recession on B-school placement

The job market, according to B-Schools that have released their placement data, hasn't looked this good in a long time for fresh management graduates. Top global recruiters have upped their hiring, average salaries have jumped by a minimum of 20 per cent and the number of companies visiting campuses for placement interviews has touched the three-digit mark in most institutes.

The 2012 Placements Story is best told by the experience of IIM-C. Campus interviews at the institute were slotted to be held over five days, but each of the 356 students of its graduating class bagged a job in four. And some must have landed more than one, because the number of collective offers for the batch stood at 423.

Leading the field, of course, is IIM-A, where the prestigious Boston Consulting Group has issued offers to 17 graduates, as against 11 last year. The placement process is still in progress at IIM-A, so the final figures aren't in.

Already, the average salary being dangled is reported to be in the stratospheric Rs 22 lakh to Rs 27 lakh range. The amounts on offer are being buoyed because of the interest evinced by big-ticket consulting companies such as McKinsey (which also hired 17 students from the Indian School of Business, Hyderabad), Bain and Co, AT Kearney, Accenture and Oliver Wyman.

At IIM-C, Zurich Financial Services have come to an Asian BSchool for the first time in its history to recruit for its Zurich and New York offices. Bank of America Merrill Lynch, according to CoolAvenues. com, has hired for an international finance opening based out of Hong Kong.

Capital One has made a global offer for its Dallas (Texas) office. And Swiss- Italian steel giant Duferco is hiring for the first time for its Lugano (Switzerland) head office.

The good news isn't limited to the IIMs. "As many as 98 per cent of our students got jobs within the first three days," an ebullient Fr. E. Abraham, director, XLRI-Jamshedpur, says.

Global investment banking and securities firm Goldman Sachs has made 12 offers for asset management and investment research jobs at the institute. XLRI's graduating batch of 235 has snapped up 284 offers, confirming the pattern of more jobs than new graduates.

Even at newbie IIM-R, the graduating batch of 47 has 58 offers to show, and the placement exercise is continuing. At Bharatiya Vidya Bhawan's S. P. Jain Institute of Management and Research, the batch of 176 has got 257 offers - 51 per cent of them going home with an annual domestic salary package of Rs 15 lakh or more.

"Our highest domestic salary this year is Rs 19 lakh, compared with Rs 15.5 lakh last year," Munish Bhargava, head of placements, IIFT, discloses. "The average salary of our students has also gone up to Rs 12.1 lakh from Rs 11.62 lakh last year," he adds.

IIFT students have accepted offers from 80 companies, including 33 first-time recruiters such as Duferco Group, German logistics giant Duegro, consulting biggies KPMG and Technopak, and ecommerce leader Flipkart. At XLRI, the highest domestic salary is Rs 40 lakh and the top international offer stands at Rs 61.8 lakh.

B-Schools attribute this surge in interest in hiring to the active role of the alumni. "Our alumni network around the world played a critical role in the placement process," Bibek Banerjee, director, Institute of Management Technology, Ghaziabad, says.

The sentiment is shared by Amit Dhiman, IIM-Calcutta's placement director, who says in a statement to CoolAvenue.com: "The alumni played a crucial role in this bad market scenario and were there to support us whenever we needed them. This shows the strength of Brand IIM-C."