Debt Worries, Unusual Problems- Unusual Solutions..

Since 2008, when the economic ills were being treated with generous does of liquidity, the core crisis of debt management was postponed for some time. Now those ghosts of the pasts have come back to haunt those economies.

Visit to any of the European countries, you will realise, how clean the roads are, how well built the infr

astructure is, how well maintained the entire country is. The question that I used to ask everytime is, where do they get such money from? how do they fund these projects? why there are so less people and so many facilities? Tell an European to work overtime (after work hours) & you will find a person scowling. Ask him to pay for his medi-aid and he will scream cruelty.

What they did not realise is that, while creating such benefits for the public, governments used debt route to finance it. These measure did help in increasing the government expenditure, which in turn multiplied the effect on the economy. At the same time, it also created huge liabilities for the governments.

These debts now have become the cornerstone of the current crisis. The governments do not have sufficient monies even to service those debts. They have been over-leveraged.

As the solution for it and they will discuss, how fiscal deficits have ruined the economy. what is not realised is that these deficits were financed to create assets (huge infrastructure), which have no or neglible returns. That was a terrible waste of money. How have they solved it? By pumping more money in the economy, which is again raised by debt.

Now everybody wants to reduce deficits, that too not by raising incomes rather by cutting down the expenditure.... Whatta logic?

You reduce expenditure and that leads to reduction in income (as private investment/expenditure is already in doldrums), this will in turn lead to reduced tax revenues of the government. The government responds by reducing more expenditure. (that's cascading)

After long time, really good move was seen in the markets, i.e. reduction of deficit by combination of reducing expenditure and increasing of revenues. This was done by Italy on August 14, 2011.

Raising revenue is a good option. This was further reiterated by calls from Warren Buffett to increase tax revenues from super rich.

Lets hope, such sense spreads to other European and US economists too. One has to know that you cannot get rich by reducing expenses but by increasing revenues.

Reducing expenses will have multiplier effect on economy. Increased revenues will provide room to governments for maneuvering. Mindless austerity measures will not lead us anywhere, it will just shrink the economy. governments not only need to service their debts, they also need to have planned expenditure.

Mandatory Cost Audit - A Necessary Devil?

So here comes the NEWS. The government has changed the applicability of the Cost Audit from industry/company-specific to generic.

On one had it marks a good attempt to fill the loopholes in existing policy of applicability of cost audit to various sectors and companies but on other, it calls for raising a basic question - "Is cost audit necessary"?

Of course, (nandatory) cost audit is, still, supposed to be one of the vital bases for formulating regulatory/legal framework relating to price control (like pharma, fertilizers), excise and other levies (like cement,agrochem) and other direct or indirect taxation.

But, as a matter of fact, most of the companies coming under applicability of cost audit, take it just as yet-another-compliance statement (it may be noted that the author is a qualified cost accountant having spent three years at cost audits of various industries). No company would like to dilute the information on the productwise cost component split, willingly. I am neither saying that they are correct nor that they have fullest right not to disclose this kind of information. However, I feel that companies will comply with the requirements of section 233B [cost audit], 201 (1) (d) [cost accounting records] of companies act happily only and only if they feel, it is a "value-adding" activity for the company itself (well, the ICWAI has been stressing that it IS a value additive activity, but in fact, it is nowhere visible from the format and ingredients of the Cost Audit Report.

The cost audit, by its nature itself, is quite different from other forms of financial audits like statutory / internal / concurrent / tax. Financial audits have a well defined rules and framework (like Accounting Standards). However, in case of cost accounting records the methodology and parameters for cost measurement or assessment or allocation or apportionment differ from industry to industry (it even differs in companies of different size, operational area within same industry). The existing set of CAS (cost accounting standards are definitely not sufficient to cover them all. Moreover, the industry-specific Cost Accounting Record Rules need a detailed review and serious make-over with the changing situations.

There are very few countries in the world which have this kind of mandatory cost audit (and the countries where it is not mandatory or it is not at all existing comprise of all sorts like capitalist, socialist and communist). In India, it was made mandatory in line with socialist principles set by our Government in early days with a view to "general good". It had vital importance in the days of pre-deregulations. The Institute made a good attempts of revising the format of cost audit report in last decade. It needs to cover whole gamut of cost optimisation with respect to ensuring optimum pricing and utilisation of countries resources. For example, when the provision covers Cement industry, it is understood that cement is a basic factor of countries infrastructure. But then, the Realty sector also needs to be covered to ensure that the planned benefit of policy which may be based on the cost audit reports of cement companies, are delivered to the society, the ultimate user and owner of the national resources. Likewise, covering consumer electronics seems beyond reason based on the ideas behind the applicability of cost audit.

The point is not to prove the cost audit redundant or useless. It is an endeavour to make it more comprehensive and useful for the nation as well as the corporates (and ultimately the consumer). I think, let's hope that the current move by the Government is the initial step towards the same.....

What do you think?

RUPAY-- Alternative to VISA & MaterCard

National Payments Corporation will launch India's very own payment card "RUPAY".

Some data on it:

Name: RUPAY (earlier "IndiaPay")

Conceptualized by: Indian Banks Association (IBA) on instance by Reserve Bank of India (RBI)

Designed By : Ernst & Young

Logo By: Ernst & Young

Number of participating Banks: Ten (10)

All done through: NPCI National Payments Corporation of India

NPCI setup in : 2009

All 6 Public sector Banks, 2 Private Banks & 2 Foreign banks own stakes in this.

Amount paid to international cards in 2010 : INR 5 Billion (500 Crore)

Percentage of domestic transactions : 90%

Debit card transactions in January 2011: INR 37.12 Billion (3712 Crore)

Credit card transactions in January 2011: INR 69.35 Billion (6935 Crore)

Leverage : National Financial Switch

Reliance - Shale Cost

Reliance in past two months has made its presence felt in the emerging Shale Gas business with acquisitions of stake in two companies i.e. Atlas Energy Inc for its marcellus shale acres at pennslyvannia and Pioneer Natural Resources Company for its Eagle Ford Shale acreage.

Reliance has always been reluctant to invest in the international markets as they consider them to be more risky propositions. The thumb rule used while investing is the proposed venture should give them returns of average 20% on the investment. In case of the ventures outside India, they expect the returns to be atleast 10% higher considering the additional political risk involved.

Reliance has agreed to pay $1.699 billion for 40% stake in Atlas Energy's venture & $1.315 billion for 45% stake in the Pioneer's venture. the average acreage accrued by Reliance is 1,37,000 acres and 1,18,000 acres respectively. The average cost per acre is around $11,820 together

we will now view these investments in the above mentioned ventures.


Company : Atlas Energy
Venture : Marcellus Shale
Total acreage : 343,000
Reliance Share : 137,000
Total Cost : $ 1699 million
Cash payment : $ 339 million
Balance : $1,360 million (carry arrangement)
period : 4 years (assumed)
Normal cost per acre : $12,401
discounted cost per
acres : $6,309

If we consider reliance will maintain its rate of return of 30% as expected, then the price appears to be far cheaper. further, the company already has 5 wells running and producing around 28 mmcfe per day.





Now lets look at the Pioneer deal:



Company : Pioneer Natural Resources

Venture : Eagle Ford Shale
Total acreage : 289,000
Reliance Share : 118,000
Total Cost : $ 1315 million
Cash payment : $ 263 million
Balance : $1,052 million (carry arrangement)
period : 4 years (assumed)
Normal cost per acre : $11,144
discounted cost per
acre : $5,428


Keeping this analysis, Reliance seemed to have struck bargain.
am still wondering, why markets have not factored in these gains and only looked at absolute investments and not the discounted ones...

EURO hogwash - Solving problem with a problem

The Greek crisis has the origins in the excessives of the public expenditure without eye on the proportionate returns from it. What does that mean?

It means the exchequer has spent far more than it can afford to do so. That means the government expenditure far exceeds the income it earns. The crisis-because the income now cannot take care of repayments of debt raised for expenditure.

Till this, we understand what is going on. Now what has EURO package proposed?

1. Balance of Payments facility to Euro members from 60 billion to 110 billion. that means more debt for the governments;
2. Increasing Euro guarantees upto 440 billion in the form of Euro stabilization fund. where will this come from? from more debt.
3. Finally IMF facility of additional 250 billion. this is not free aid. but more debt.

So what are we trying to do? we are trying to stave off the debt crisis by having more debt. so that we can roll over the debt. This means we are just trying to postpone the inevitability. But this is with the assumption that growth will return and the governments will have sufficient debt service coverage ratio.

Now what actions are we taking to make higher growth a reality:

1. Tightening the belts by reducing the expenditure (public). In any country more than 20% of the GDP is directly or indirectly funded by the government. this action will have impact on the GDP of the country (more probably negative)
2. This will have impact on huge liquidity surge in the markets as countries will be flush with funds (lower cost). This in return will result in high inflation.

Does anybody still think, we are resolving the issue? Comments please...

Warren Buffet mines Gold with Swiss Re deal

Warren Buffet has done it again....

Warren has mined gold with previous deals with General Electric and Goldman Sachs when he provided them with desperately needed cash.
The terms of the deal with those have been sweetener to the shareholders of Berkshire Hathway and has also lead an example of bargain hunting.

Warren Buffet has always being limelight for his extra-ordinary sight for bargain deals. He is the fervent disciple of Benjamin Graham, who changed the thinking about the investment in the stock market.

Warren Buffet's call of not investing in last years and sitting on pile of cash has paid off with immensely huge returns.

what you see on the right side is the Head Qaurters of the Swiss Re. Berkshire Hathway has provided cash of $ 2.6 billion to swiss Re (world's second largest re-insurer).

Investment : $ 2.6 Billion

Type of Investment : Convertible Coupons(notes)

Guaranteed Rate of Return (coupon rate) : 12%

Options: Convert @ 25 Francs per share (common stock)

Option Expiry : 3 (three) years.

Other Option : Get perpetual returns of 12% on the loan provided.

Current Interest rate: Almost Zero....

The stock is currently trading at 16 francs.

Warren Buffet has not let an opportunity go unattended. He has taken full advantage of the available opportunity.

A really good example for us to learn to invest.

Recession Causes - More of change in Perceptions

Economics is not a pure science... it is a social sicence.

So while studying any economic condition, we need to understand the social part of it to gain more understanding of it rather than looking at the abstract (relatively) terms as money supply, demand, supply, etc..

Even while studying demand and supply economics(which also has become obsolete after emergence of indifference curve analysis), the concept of demand has undergone lot of change...

While studying effect of demand on price, we should not loook at demand but "effective demand" So what is effective demand?

Effective demand is that demand that has three features
(a) Demand for the product;
(b) Ability to pay;
(c) Willingness to buy

So when demand is backed by ability and willingness, then it constitutes effective demand, which means demand which can make a difference....

The purpose of explaining all this is that the terms like willingness(which is more of cognitive term) have crept in the field of economics(so called science). This type of analysis has led to emergence of term called behavioral economics....

Now back to causes of recession and boom. The perception of the general public that there is more probability of gain in future as compared to now, leading that speculation and Vice Versa is the root causes of boom and recession...

The term more appropriate for this is "Irrational Exuberance". in fact this phrase was first used by former Fed chairman Alan Greespan to explain the irrational growth in stock markets during 1996-97...

Later Yale professor Robert Schiller came out with the book with same title in 2000 when market fell heavily....

This phrase became a catch phrase to explain the irrational boom. The important part is that this term takes into account the sentiment of public and tries to explain that boom and bust are more because of the sentiment of the public rather than the function of the forces of economics...

I hope I have a made point to you all......