India's parallel economy is at 40% of its GDP

Take that!! all you economists and analysts, who keep debating over endless hours on prime time television as to what the finance minister might deliver this friday. "Black money" the other proxy term for "parallel economy" is at its rampant best over the last few years. We have allowed the menace to multiply to such levels that today it forms more than 40% of our GDP and the FM still keeps talking about teething woes on the fiscal deficit front and the need to widen the tax net further to maintain bouyancy in the government coffers. Money can be differentiated as either 'black' or 'white' based on whether the incidence of taxation falls on it. Money is said to have been acquired through legal channels or is termed 'white' once its within the ambit of taxation. Having said that black money isnt illegal per se. A sizeable section of the population acquires money through hard work, moral and legitimate means and consequently conceals a portion of the same. Even if we take the case of agriculture, it will do good to term the entire money sloshing around there as 'black' as the sector as such falls outside the tax net. We have cases of the wealthiest of farmers in India forming a core group of the proud 10 million HNI's (High Net Worth Individuals) in our country. But what the FM should worry about is money acquired and concealed through illegitimate means and those currencies that flush around the suitcases, bedrooms and bathrooms of the elite including that of his own political kinsmen, who in my opinion are the biggest repository of black money and who refuse to be reined in by any judicial or regulatory force or authority. These political babus are the most intransigent group in our country who sniff out all loopholes available to evade the tax net, take advantage of the porous capital controls in the financial system, engage in perennial round tripping of money and explore other alternative routes to ensure that their capital appreciation and incomes go tax free. Ours is a country where the Income tax department serves a notice every day to the honest tax payer asking him to pay more, uses its workforce to locate mistakes in salary returns on paltry or meagre surcharge computations and acts so diligently in recovering money from the middle class Indian. Successive FM's have been rest assured that direct tax revenues will remain bouyant on account of the tax recoveries from the rising middle class (the eternal suspect of the Ayakar Bhavan). Every loophole in taxation ambiguties affecting the common man gets plugged through TDS, VAT or an FBT. What about the FM's own fraternity? We still have a Laloo Prasad Yadav leading a king-size life wit his comrades, cattles and their fodder; We still have a Mayawati declaring her unaccounted wealth as gifts from her BSP cadres and getting them exempted from the tax authorities themselves through their imprimatur orders; We still have an Amma (As im from chennai i will call her 'Amma') who has been exonerated from all the disproportionate wealth that she has amassed over two decades; We still have a Rahul Gandhi who derives illegal income through drug lords from Latin American countries; but its always film stars and real estate magnates who make news when it comes to tax authorities. They are an easy target to make up for the deficits of the IT department but where are these double standards taking us going forward. Equality before law is a constitutional neccesity but that seems to be a term unheard of in our economy.All the debates on our economy and the budget talks or even listening to the budget seems futile and worthless when the proponents of the parallel economy are sitting right under the nose of our finance minister.

The 'Budget Mania' seems to have caught on to most of my friends. An almost non event has become a festival of sorts due to the media hype and hoopla among the avergae masses. As many have been asking me about my "wishlist " to Mr. Chidambaram...here it goes...
Dear Mr. PC
Iam not gonna request you to keep your word on maintaining the growth momentum of this economy or give the much needed thrust on reforms front or focus on social infrastructure, agriculture etc etc...There must have been a half a billion who must have already told u all this with enough economic jargons interspersed between the lines. I have a unique request. Its a far more economical and largely profitable way to wipe out the entire fiscal deficit of our nation in one stroke. Unearthing of black money should start at the top of the pecking order and those sitting at the fountain head are your own colleagues in the parliament (572 of them if my numbers are right). Iam given to understand that the budget session, i mean the time when u would be presenting your final budget prior to the election year to the nation, has historically witnessed full attendance by both houses of the parliament. Therefore if an Income Tax raid can be arranged at all the houses of these 572 elite chosen ones of your wonderful 'Ivy league'(which may include ur residence at Haddows Road too), that would prove to be a wonderful icing on the cake in your chequered political and business career. U can leave your esteemed chair after presenting the budget filled with a pompous gait and a satisfaction at having done the biggest political class act that would benefit the common man and the country at large. You would kill two birds with one stone by adding a humongous amount to the government's currency chest as well as wiping out the fiscal deficit in toto, a major negative that has harmed our economic image globally over the years. So honourable finance minister, kindly ponder over this citizen's wish list, maybe over a cup of "black coffee" if i may suggest so. May god give you the political will to carry out this "dream reform". You have one chance to create history now!!!

Why hasn't the stock market responded to a Fed rate cut

The markets are continuing their downslide from the recent top of 5383 to sub 5100 levels. in the intermittent time US Fed has cut its rates twice by 75 and 50 basis points respectively. The Fed discount rate has reduced to 3% overall. The move by Fed is largely seen as an act to prevent US from falling into recession and to boost consumer spending across the board. This magnitude of cuts would have usually been seen as a double delight for emerging markets given the excess liquidity flows that would flow into these geographies. However post sub prime mess with increasing defaults by consumers/borrowers, foreclosures and bankruptcy claims of various hedge funds and write offs by investment banks on Asset backed securities, the crisis situation has become an albatross around the neck of the US economy. The unanticipated 75 basis points cut announced last week instead of bringing cheers has taken the world by surprise and struck a cautionary note . Analysts across the globe have started forecasting a large and looming crisis for global markets that would result from a recession in the US economy. FII's all across the emerging markets who have made stellar returns over the last 4-5 years of Bull run have started booking profits even on their long term investments. They are only offsetting the losses made from the sub prime fiasco that was orchestrated by them. In this kind of scenario, money isnt flowing into countries like India and China as most investors prefer to sit on cash. As we all know, liquidity is the mother's milk for all bull markets and in its absence, bears definitely have an upper hand atleast for the moment.
As a note of caution for the FED, they would be prudent enough to know that it was bad credit under the Greenspan regime conjugated with unscrupulous lending practices to consumers with lax credit standards, that led to this collapse. Now by cutting the lending rates, more bad money is going to flow into and out of the US economy. As more bad money flows behind existing bad money, problems only get compounded. Wouldnt it have been more prudent to take the hit, take the losses, suffer write offs, get into recession,face the problems and after having weeded out the excesses in the economy, a prudent call to revive the economy should have been deliberated upon.

Impact of Fed rate cuts:
* Every time the fed rate is cut, the dollar is going to crash even further and as a result crude oil
will shoot up to unprecedented levels. As CLSA has pointed out crude oil at $200 doesnt seem
far away if Fed keeps cutting rates frequently.
* Gold prices, already at life time highs, will inch up even further from current levels as
whenever the OPEC countries feel rich and smell of surplus money, the same flows into gold.
* For Emerging markets like India that were trading at reasonable valuation 4 months ago at
15000-16000 valuations (Nifty 4600 approx), it was the first Fed rate cut by 50 basis points
in October'07 that led to the flow of "hot and speculative" money into India which propelled
the Sensex to the overstreched zone of 21000. Its this excess money that has flown out of the
market within a couple of days on Black Monday and Terrible Tuesday of Jan 21 and 22. Fine
the excesses have been removed or washed away from the bourses but not before sucking
out a lot of blood on Dalal street. Investor's wealth estimated at 7,00,000 crore have been
completely wiped out and traders with positions in 'F n O' (Futures and Options) are still
smarting from their losses. It will take atleast six months or more than a considerable amount
of time for them to recover and get back to their trading terminals. Its more of an emotional
shock rather than monetary losses. Over the past two weeks, the stress levels of traders have
heightened to unexampled levels, so much so that a famous lake in Gujarat has been sealed for
two months to prevent investor suicides.

Its indeed quite understandable as to how difficult it is to be a Fed governor. But Ben Bernanke is purely playing to the gallery at the moment without realising the impact of his actions on the global financial stability.

Financial Services looks attractive

Yes financial services, the sector on which most analysts are extremely bullish on going forward. The reason being, the next trillion dollar opportunity for the Indian economy lies over the next five years from 2008-2012. It was only last year that our GDP crossed $1 billion and with the latter growing at 8.5% p.a on an average, we are the second fastest growing economy in the world only behind China which has been consistently growing at 10% p.a over the last decade albeit the veracity of their claims.

Mumbai is all set to become an International Financial centre (IFC) by 2015 going by the promise held out by Percy Mistry's vision document to make Mumbai an IFC. Once the proposal does come into effect, the amount of financial transactions that would be handled out of India would be inconceivable. The benefits of Mumbai becoming an IFC would also flow in the form on secondary outsourcing and back end work to other ancillary cities like Pune, Chennai, Hyderabad and Bangalore where a lot of talent pool is already available in abundance.

The scope for financial intermediation in our country is pretty high with the huge investible resources waiting to be ploughed in to the market and the demographic dividend expected to last atleast for the next few decades. The savings rate in India is less than 32 % of our GDP, out of which the household savings rate is below 16%. The Housing Mortgage to GDP ratio is also below 6%. These two are enough indicators that go a long way to prove the tremendous scope that exists for financial intermediation in our country.

A large and sizeable pool of financial planners have emerged in our country to address the needs of the" asset and wealth management" industry. India is beginning to produce crorepatis and millionares by the passing of each day. We are transforming oursleves from a tag of " knowledge creators" to "wealth creators" for the world at large. We have reached/seen such a metamorphic rise in the evolvement of corporate India that the French president today is making "humble requests" to the CII to address unemployment problems in France. With so many HNIs (High Net Worth Individuals) taking the world by storm, the wealth accumulated by them needs to be managed and managed well with profitability being the sole objective.

Mutual funds have seen their assets under management (AUM) swell by over 637000 crore as at Dec 07. This indicates the confidence of the average retail investor in the growth prospects of our Indian economy. Every month we find 4 to 5 new fund offers raking in the coffers on a regular basis. Now government has relaxed provisions for PPF and pension funds of public sector undertakings by allowing them to invest in the stock markets lured by the attractiveness of returns therein.

Infrastructure in our country is still facing huge bottlenecks in our country and is crying out for immediate reforms. As we all know, things cant happen overnight. The gestation period to solve problems in infrastructure requires foresight and political will. Given the constraints in coalition politics, even a government with all the requisite potential and wherewithal will obviously flatter to deceive as the UPA has done so far. But still, I for one firmly believe and reiterate that in a democracy like India, problems will find its own solutions and infrastructure is one such element which will address itself. Now coming back to the point of financial intermediation, herein lies a huge opportunity in infrastructure with the amount of investments expected to be flighted in both through FDI and FII routes not to forget our domestic PPP's (public private partnerships). Every sort of an Investment will find its source to either debt or equity. These can only be the two major means to raise resources and that requires financial intermediation.

The opportunities that lie ahead in the form of capital account convertibility and opening up of the banking and insurance sectors will be deliberated upon separately by the author at an appropriate time

Till then to conclude ...our financial services sector looks robust in the medium to long term even without any seminal signs of second generation reforms taking off.