size matters (even in recession !! )

Even before the debates on estimates of cost of sub-crisis are subdued, a new debate has started whether economies across the world are reviving. At least in India we have got enough reasons to believe so- a significant rise in IIP index, increased freight movement across ports, companies going on hiring spree etc. The pace at which banks were collapsing at one time has been shadowed by the pace at which economies around the world are recovering now.

A large part of this fast paced recovery should be attributed to governments across the world which have left no stone unturned in paying honest tax-payers money to crooked institutions. From Greenspan’s cheap money to Bernake’s cheap money has been a scintillating and fast journey. And mind you this is not applicable to one or two countries alone; this has been the trend everywhere. Globalization in true terms!!

But what signal is it sending to the companies? Go and enjoy the world till the sun is shining; when there will be night some Fed will come to save you. “If you were not taking risk and making money, you have been a fool, is the message which companies are getting by all this”- says a noted economist. But I have just a correction to make here. “If you wanna take risk, which is not even comprehensible to yourself, please make sure that your size is big enough.”
Small fishes are not entertained here – Fed Reserves.

economics with cuteness......

Okay c’mon tell me what is wrong in studying economics in graduation?

It came to me striking while I was having a lovely chat with a few lovely girls in a café recently (I don’t know why everything related to girls comes striking to us?). I was sitting with the friends of a friend of mine so I thought to concentrate on her friends (of course to make them feel at home); especially to one whom I found really cute. Our jokes were understood by each other very well followed by an extra ounce of laughter. As a group also we were going nicely, discussing the latest movie- NewYork, dressing sense of Katrina and John, then we went on to discuss new movie launches in pipeline (I was dreaming the future prospects) until one of them raised a technical question (I hate it when girls raise technical issues and that too in between nice talks). The question pertained to my studies. Economics Graduate I said. And after that the reactions changed from wow feeling to Oh! "Oh the number stuff? Why even after so many economics theories we can’t prevent a recession when it comes? Why everything in economics start with hypothesis?"

Oh my god this was not where I wanted to land.

And then started what I may call my nightmare. My cutie pie asked- Did you take Human Resources Management as your specialization to give yourself a human perspective after this economics degree or you were genuinely interested in taking up HR? I tried to lighten up the environment by cracking actually it was because of pretty girls in HR that I took HR. But my jokes were not jokes anymore. I could have understood if it were from one or two girls. May be a breakup with an economics guy or some time table guy (remember Dil Chahta Hai?); but there I was with four girls just hell bent to post mortem my decision of taking Economics at first place and then the dare to follow it up with an HR.

So finally I had to take up the stage to clear things about economics. Yes economics guys are a little enticed towards numbers (when somebody asks us how many hours you slept yesterday we tend to say 8 hours, 33% more than my average sleeping hours and so on). Yes economics theories did fail to solve the problems many times but believe me I had nothing to do with those theories. So finally 43 minutes later, after 7 arguments in favour of economics and 3 proofs about economics guys being human (even without studying HR), we came to the conclusion not to ostrich economics people from society. But in the process of reaching to conclusion my cutie pie was lost somewhere. My future dreams which had started coming in the beginning of the talk were forgotten in between somewhere. What an opportunity cost of discussing economics!

who says we learn from history?

Protectionism as a policy is one of those policies which had hurt economies all over the world very severely. But the sad part is people get a feeling that by applying protectionism, government is doing them a favour. Take a recent example of USA government which is putting a condition on bailout companies to take only Americans as their employees (Big story in today’s newspapers on cutting H-1B Visa).

In a way government is saving its people and organizations by providing them a shelter. But what about the cost that the organizations has to take in the form of increased payment (more people would have created an excess of supply and decrease in wages) and loss of quality (less people to select from; leaving talented migrated people), and that too at a time when any organization needs these two things the most.This way USA is protecting economy or digging the hole further?

This reminds me of July ’08 when food prices were on their peak due to shortage of food grains. It so happens that one part of world (which is a significant player in that grain market) may not be able to produce grains due to any reason say drought for argument sake. Now there is a shortage of that particular grain in world market. Prices of that grain starts shooting up and other grains (substitute goods effect) also catch up soon. Countries start feeling scarcity of grains; they tend to go for the policy of protectionism and don’t send their own production out in order to protect their interests. But this creates more scarcity outside and further increase in the prices. Hence other nations also follow the suit (protectionism), and in the process drag market for that commodity into deep trouble. This is exactly what happened which started with Australia where continuous drought for 7 years reduced rice production by around 60-70%. At a time when all economies were supposed to come together and take steps, they were busy in forming protectionism policies for their countries.

Now USA is repeating the same mistake. Who says we learn from history?

“Does petrol cost us what its price is?” – one more reason to be an entrepreneur..

What was the cost of petrol when you bought last time? 53.5? or 45 ? or 39? Okay whatever be the price; is it possible that the person buying next to you is buying cheaper than you? Or may be dearer than you? Is it possible? YES. It is. How? Read on...
There is difference between the price of petrol bought by an entrepreneur and petrol bought by a person working as an employee. It is the rate of tax and calculation method, that create the whole difference.
For the sake of building the model we assume that tax rate for everyone in the country is 30%. We also take market price of petrol as Rs 50/litre. If the income of an employee is Rs 100, after tax he is getting only 70 and hence for him the petrol is costing around Rs 71.42 (50/70*100) effectively because he is paying 50 Rs out of his income of Rs 70. On the other hand, for an entrepreneur the same kind of an expenditure gives a tax shield to the effect of 30% (how ethical, showing personal expenditure in business, is a different issue)which makes his income of 100 as 130 effectively. So for him, effective price of petrol is Rs 38.46 (50/130*100) only. The same logic goes on when we buy laptop or a software or electricity and so on and so far.
So what’s the lesson – there is one more reason to become an entrepreneur – effective use of tax slabs.

People leave their highly rewarding jobs to realize a distant dream of their own and become an entrepreneur. So if a good idea strikes me, will I go on to become an entrepreneur? The thought of starting something of my own is becoming more and more prominent in me for quite some time. But sometimes I think I am not ready yet. I don’t have any experience in the way things move in corporate world. May be I would like to have a firsthand experience with corporate and then 5 or 7 years down the line I may think of becoming one. Let’s see how things turn out.

Building Infrastructure is NOT a solution to current recession

Governments all over the world are mulling various options to overcome recession. Building infrastructure is candy of eye of all the governments as the solution. . J.M. Keynes, in his book ‘General Theory of Employment, Interest and Money’ argued about the relationship between production, wages and employment. According to Keynes, purchasing power in the hands of people was the most crucial factor for the economy to revive. He suggested that government should pump in money because no private investor would be interested to take risk in turbulent times.
Although the benefits to economy from building the infrastructure cannot be neglected but I have reservations about whether it is a solution to recession. In earlier time (when Keynes has given his theory), building infrastructure was labour intensive. But today it is highly mechanised, using little labour. Dams, power plant, airport, roads etc are capital intensive these days, not labour intensive. With today’s technology, building infrastructure is not a big job creator unless we insist on inefficient, obsolete techniques, a mistake that government of India had committed when it stipulated that 60% of cost of building road under NREGA (National Rural Employment Guarantee Scheme) should go to wages. As a result, we got low quality roads which disappear almost after every monsoon. This approach of forcing the mechanism of building infrastructure can never create good infrastructure.
Also, normally infrastructure projects have a long incubation period. So they have their own time in disbursing money and hence cannot provide Keynesian boost.