Can you live with Rs 32 a day in Indian cities? This is what everyone is asking after planning commission came up with this figure in its revised estimate to calculate BPL (Below Poverty Line) parameter. What about living with Rs 26 a day in Indian villages? Impossible, you say. That’s the whole debate that has been going on in India for last few days.

There is certainly something missing with the way poverty is measured in India. The Government is not unaware of it fortunately and there have been many initiatives by the Government to assess the right poverty line. Though in the end, Government shudders and chooses the most optimistic estimate of the number below poverty line for various reasons.

Poverty Calculation – A primer

Let’s understand how poverty level is calculated in India. The poverty estimate in India is solely based on calorie intake of food. It is defined as consumption of 2100 calories per day for urban population and 2400 calorie per day for rural population. The difference is because of the perception that villagers need more calories because they do more physical activity. Hence if a person in urban India has enough money to buy 2100 calories worth of food, he or she is supposed to be above poverty line. The money required to buy food worth 2100 calorie a day for a month is Rs 539. Remember that housing, education, and healthcare are not measured. This was measured in 2004-2005.

Does this sound very less? If yes, you are not alone.

Come 2011 – Re-estimation

The poverty line is calculated every 5 years. Hence the new estimation was done few days back taking into account the inflation. This resulted into Rs 962 a month for urban areas and Rs 768 a month in rural areas. If you take daily requirement, it is Rs 32 a day in urban area and Rs 26 a day in rural area. This has attracted criticism from sociologists, human rights activists, and people in general.

The issue became so hot that planning commission Chief Montek Ahluwalia had to meet Jairam Ramesh, rural development minister and Prime Minister Manmohan Singh.

Multidimensional Poverty Index

United Nation Development Program (UNDP) and Oxford Poverty and Human Development Initiative (OPHI) have defined a new poverty measurement index, known as multidimensional poverty index. This index is calculated based on deprivation of a basket of services that are needed to live at a bare minimum level.

This includes standard of living, health services, education, and assets. Education factors number of years in school and child enrolment in school. Health services factors the mortality rate and malnutrition & its consequences. The standard of living factors access to potable water, sanitation, cooking gas, flooring, and physical assets. The multidimensional poverty index looks at the comprehensive picture to define the poverty line. As per this estimate, India’s poverty level is about 55%. This is a huge number.

The rationale behind calculation

There has been much criticism to the process of calculating poverty. Though we can always question the process and the factors that should be included in poverty estimation, there is strong need to estimate poverty line in a country like India. Poverty estimates help the Government to define policies and allocate funds needed to serve people below poverty line. It also provides Government data to judge the efficacy of its policies and poverty elimination programs.

Since the start of your professional life your well wishers including family members and friends might have told you, “Work Hard and Earn More”. You possibly made it the mantra of your life but the day you received your pan card and approached the income tax department, the mantra started to sound like a myth after your rendezvous with the demon called Income Tax. Now the mantra caption sounds like “Work Hard and Earn More to Pay More in Taxes”.

In such a scenario as a taxpayer you are likely to look out for good news whenever you hear that the policymakers are doing something regarding Income Tax. One such policy decision that is likely to affect you is the introduction of the DTC (Direct Tax Code). The Finance Minister has reassured that the DTC will be hopefully cleared in the winter session of Parliament and will be implemented from Apr 2012.  Let’s look at what is in store based on the decisions that stand as of today.

The Good News

Enhancement of Tax Slab

Smile as the tax exemption limit now stands at Rs 2 lakhs which was earlier 1.6 lakhs. The tax burden is lessened by 41,000 in the highest tax slab.

Investor friendly Capital Gain Tax

Only half of the short term capital gains on equity will be taxed. Long term capital gains from equity have been left untouched. Capital gains from property will be considered as income and for tax purposes the gain will be added to your income. Hence your tax liability will be calculated as per the slab you fall under after the addition of gains.

Enhancement of Exemption limit from 1.2 Lakhs to 1.5 lakhs

With DTC now it will be easier to claim exemptions as it will reduce the confusing number of investment options available. An individual can still claim deduction of Rs 1 Lakh as per old tax regime but the investment options will reduce to NPS, Superannuation funds and pension funds like EPF and PPF. Also, the exemption for tuition fee for children is now part of this 1.5L where you can claim a deduction for a tuition fee of Rs 50,000 if you pay tuition fees (max 2 children) or if you have taken health insurance/mediclaim policy or if you have invested in pure life insurance product where the sum assured is 20 times annual premium.

Tax benefits of home loan

It is unclear if the principal due repaid for your home loan will continue to enjoy tax benefits but the new DTC bill has most definitely retained the tax benefits on the interest due repaid on your home loan.

EEE treatment of GPF, PPF and pure life insurance products

In earlier tax code, investments in the above schemes were governed as per EET where investment and accumulation was tax free but withdrawal was not. In the New DTC it’s proposed that the withdrawal from these schemes will also be tax exempt.

Enhancement of medical reimbursement limit

Now you can be happy even if you fall sick as DTC proposes to enhance the medical reimbursement limit from Rs 15,000 to Rs 50,000.

The Not So Good News

No Leave Travel allowance

If you like to go on holidays, DTC will tax you from now onwards.

No special treatment for being a woman

No gender bias as per DTC as the extra tax benefit for women seems to be non-existent.

Reduction in tax exemption period of NRIs

NRIs will be taxed if they are earning in India and their stay exceeds from 60 days. Earlier tax exempt period was of 180 days. This sounds like a bad news but the finance minister has assured that this is under discussion and just staying in India for 60 days doesn’t make NRI’s liable for taxation as there are other clauses attached to it.

DTC in its current form sounds to be tax payers friendly and let’s hope Indian Government carry’s on with tax reforms so that we start loving the Tax Daemon. For the time being “Thumbs Up” for the DTC.

We tend to ignore the basic fundamental of stocks when we invest. However small the ownership of the company, we tend to buy it! Every stock represents a tiny ownership of the company. This implies that the corporate events within the company will impact the stock. The purpose of a firm is to maximize the shareholders’ value and the management is delegated with the responsibility to achieve the same.

Hence management takes action, which essentially increases the wealth of the shareholders. This may not be true in many cases, but that’s beyond the scope of this article. While many fundamental actions within the company impact share prices, let’s examine 5 of these actions that have a direct impact on share prices.

Announcement of Dividends

Dividends are part of the profit that the company distributes among its shareholders.

The impact of dividend depends on the amount of dividend declared by companies in proportion to the stock price. In a perfect market, share prices should go down by the amount of dividend declared. However, this may not happen in reality. If the dividend declared is too low (below 2% of the price), the prices do not change much. However, if the dividend is significant, the prices fall by approximately the dividend amount.

Sometimes, announcement of dividend increases the share price in the short term as everyone wants to possess the stocks to get dividends. However, this is a temporary phenomenon. The ex-dividend prices go back to old prices that are even lower by the dividend amount.

Buy Back of Shares

Buy back is a confidence boosting measure by corporates where the company buys back their own shares from the open market, usually at a higher price than the existing market price. Nobody will sell the stock at a lower price than the market price. Moreover, if the management decides to buy back the shares at a lower price, it will only show that the company doesn’t think its shares are worth even the market price.

Many companies buy back their own shares to show confidence in the company and also to correct the prices as sometimes the prices are unreasonably beaten down. Buy back reduces the number of shares and hence increases the earnings per share, which impacts share price positively.

Stock Split

Stock split is an event when company splits a share into 2 or more. This happens when company thinks that its shares are very expensive (different from over-valued), and investors are finding it hard to invest the kind of money it requires. For example, MMTC was trading at a price of Rs 25000+ at one time in the past. Many retail investors found it hard to invest in such a huge amount in MMTC shares. This got split and now the price is at 600+. Investors can afford it now. In fact the number of investors has increased after the shares got split.

Splitting share enables many retail investors, who could not invest because of a high price, to invest and take advantage of a low price. This increases the demand of the share and hence price. Investors should note, however, that splitting doesn’t change the fundamentals of the company.

There is also the reverse of this process, known as reverse stock split, which involves combining two or more shares of a company into one share.

Launching the Rights Issue

If a company needs additional capital, it launches rights issues. In this issue, existing shareholders are given first right to buy the issue. Only when the existing shareholders refuse to buy the rights issues, this is offered to others.

It is advisable to buy the right issues if investors own the shares. Usually after the rights issue, share prices go down. The reason the lower prices of rights issue compared to the existing market price. The company cannot keep the price higher or same as existing market price because then there is no incentive to buy rights issue.

Mergers & Acquisition

This is one of the most high risk corporate actions. Many times, the intended objective of a merger and acquisition is not reached. In fact failed mergers are a norm. If the mergers and acquisition creates synergy between the acquirer and acquired, the share prices will go up. Market will treat the event positively. However, if market senses foul play or bad decision, it will treat the stock ruthlessly.

Usually, the acquirer pays premium to the acquired company’s shareholders. Hence the price of the target of acquisition goes up in the short term.

Why keep a watch on stock prices?

The answer is obvious ofcourse. You need to monitor the prices inspite of the logic that you just need to let your shares accumulate wealth in the long term for 10-15 years to reap the best benefits! Of course you need to do that but that does not mean you ignore to keep a watch on the prices. What if you plan to use the profits from your shares to time the down payment for your home loan or plan to buy a car without opting for a car loan – if you do not keep a watch on the prices,  the investment could prove useless to you in the hour of need.

Conclusion

Corporate actions are a good way to gauge the impending performance of the company and also the competence and intent of management. Investors should keep an eye on such announcements as there is always the information gap in the market in the short term and shrewd investors can exploit this gap.

RBI, on 29^th Aug, 2011, issued draft guidelines for licensing of new banks in the private sector. This has been cheered by corporates and NBFCs, especially NBFCs whose stock prices zoomed after the news. The draft guideline was much awaited by corporates who have shown keen interest in entering the highly regulated banking sector. RBI has sought the feedback, suggestions, and ideas on the draft guidelines by 31^st October, 2011. Once RBI reviews the feedback and opinions of experts, bankers, corporate houses, and economists, it will draft the final guidelines and invite the application for licenses to set up banks.

Let’s look at some of the important criteria mentioned in the draft guidelines.

Eligibility –

Regulation: The corporate entities seeking to enter banking sector should have successful track record of 10 years. They should be owned and controlled by residents of India. At the same time, their income or assets or both should not exceed 10% in real estate and broking activities if they are into real estate and broking business too.

Analysis: This requirement rules out new businesses with records of less than 10 years. Hence new age entrepreneurs will not be able to participate in the banking business. The requirement regarding limitation on real estate and broking shareholding is good as there will be a conflict of interest between the real estate & broking business and the bank.

Structure –

Regulation: The corporates will have to register a non-operative holding company with RBI. This NOHC will hold the bank and other financial institutions run by the corporate. The shareholders of bank under the NOHC can be non-financial businesses of the corporate. Other financial institutions of the same group cannot have shareholding in the bank.

Analysis: This was done to achieve two purposes. First is to demarcate the banking & financial businesses from other businesses of corporates. Second is to facilitate its regulation by the RBI. All banks work under the directives of RBI and having NOHC separate from the other businesses will help both the corporate house and RBI to define their discretionary power.

Capital Requirement –

Regulation: The capital required will be at least be 500 crore.

Analysis: This is a good step as it is increased from 300 crore to 500 crore. SEBI wants to ensure a larger capital base.

Foreign Shareholding –

Regulation: Foreign shareholding will not extend beyond 49% for the first 5 years. After 5 years, the existing policy regarding foreign shareholdings will come into effect. The foreign entities include NRI, FDI, and FIIs.

Analysis: The step about limiting the foreign shareholding to 49% is not encouraging. However, this is still better. The expectation was that the foreign shareholders will be allowed to hold the majority part too.

Corporate Governance –

Regulation: Independent directors should be 50% or more in the board. This is to ensure that the bank doesn’t show extra favour to other businesses of the group. The independent directors will truly be independent, not coming from their group holding companies, clients, and suppliers.

Analysis: This is a very good step by RBI. RBI doesn’t limit only the people working in the corporate group but also entities that deal with it. This will result in better and more independent decision making processes.

Financial inclusion –

Regulation: The requirement for financial inclusion is overarching, showing RBI’s move to cover unbanked population. A corporate has to clarify its plan for financial inclusion as well as open 25% branches in rural centres where access to financial institution is lacking.

Analysis: This is a noble objective but forcing corporate houses to mandatorily start rural branches to cater to an unbanked population is not right. It will be difficult for corporate houses to fulfil this when even public sector banks are facing operational issues in running branches in those areas. Moreover, objectives like financial inclusion should not be forced upon corporate houses. State cannot delegate its own responsibility to private businesses.

Other requirements –

Regulation: The exposure of bank should not exceed 10% of the paid-up capital and reserves to one entity of the corporate house and 20% to all entities combined.

Analysis: This step ensures that a bank doesn’t misuse public money by providing loans of disproportionate amount to the same corporate house and expose itself to undue risk.

Regulation: The bank will get listed in exchange within 2 years of getting the license.

Analysis: Listing will make working of the bank more transparent. Presence of retail and institutional investors as equity holders will also keep a check on bank executives from taking risky bets.

Final Comments

The drafting of guidelines for new banking licenses have been a much awaited event. There have been requests from corporate houses in the past to allow them to venture into banking. While RBI’s concerns are genuine, these can be overcome by implementing a stringent regulation.

RBI raised the policy rates by 25/50 basis points. This is the most familiar statement in media for last couple of months. The role of RBI seems to have increased recently since India started experiencing major inflationary pressure on her economy.

What exactly RBI intends to achieve by raising policy rates, also known as repo and reverse repo rate. We will make some sense of these moves by RBI and discuss the implication of it.

Monetary function

One of the functions of RBI is monetary policy structuring and implementation. The core focus of monetary policy is to increase or reduce the money supply in the market. The only way to do it is to increase or reduce the repo and reverse repo rate. Repo rate is the rate at which banks borrow money from RBI and reverse repo is the rate at which RBI borrows money from the bank.

Now what does RBI intend to achieve by changing these rates. Let’s look at how increasing and reducing the repo and reverse repo rates affect the market. If the policy rates are higher, the cost of money for banks is high. This means that the banks will charge higher interest rate for loans. The banks will also provide high rates to depositors.

If the depositors get good rates, this will encourage people to deposit money in banks. People will prefer saving because of the good returns that banks promise. This will reduce money in the market thus impacting consumption.

Similarly, when the banks start charging high rates for lending, this will discourage people from borrowing. People will postpone their purchases of home, vehicles, and other items because of high lending rates on their home loans, personal loans and car loans. This will again reduce money supply thus impacting consumption.

RBI’s objective vis-à-vis policy rate

RBI intends to do the same thing by increasing the repo and reverse repo rates. The money supply will be reduced and hence consumption will go down. If the consumption goes down, producers will reduce the price of goods to attract buyers to increase consumption. This will reduce the overall prices of commodities and other goods.

Since India is facing high inflation for last couple of years, RBI’s chief objective is to reduce the inflation by reducing money supply in the market. This explains why RBI increased the policy rates 11 times since early days of 2010. Price stability has become the main objective for RBI.

Growth versus Inflation debate

The unhindered increase in policy rates has resulted in reduced growth projection of the Indian economy. As consumption goes down, producers do not see much incentive in producing more. This impacts the overall gross domestic products. Hence the growth rate goes down as a consequence of RBI raising the policy rates.

Many experts have warned that the move of RBI is going to have little or no impact on inflation because inflation is caused by supply side constraints and increasing oil prices. RBI has no control over both these factors. This argument does sound credible as we still do not see ease in prices despite so many increases in the last few months.

The other school of thought says that the inflation has been at least capped and has not been allowed to go further up because of RBI’s move.

It is really difficult to say who is right as these are post facto observation. On hindsight, we can conclude whether the intended change was effected. However, when you have to plan keeping future in mind, nobody can be sure of the effect.

Finally

Slower than expected growth in developed economies has reduced commodity prices across the world. Oil has come down. This will ease the inflation in India too and take off some of the pressure from RBI. Hopefully, RBI will not have to increase the policy rates further.

Debt has become one of the most dreaded words in recent times. One consequence of the deepest recession since the depression is the build-up of public debt.

10 `most in debt’ developed countries

Source IMF, 2010.

National debt to the size of the economy (GDP) is one of the most important economic indicators in assessing the current and future health of the economy. The national debt consists of loans borrowed directly by the government plus any debt of the government corporations which have been guaranteed by the government.

These figures are calculated on an exchange rate basis, i.e., not in purchasing power parity (PPP) terms.

Public debt is the most relevant data for discussions of government default and debt ceilings. It is different from external debt, which instead reflects the foreign currency liabilities of both the private and public sector. External debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank (Source:  Wikipedia)

As per McKinsey the global debt increased by 3% to $158 trillion, reaching 266% of GDP in 2010.

The recent credit bubble burst has led to an enormous burden of debt. Today, countries are pondering as to how to prevent similar crisis in future and how to reduce the debt. The US national debt is 4,700 times larger than it was in 1913 when the central bank was created. With higher inflation and lower employment generation, the country is facing double dip recession.

Lets us see where India stands: While India does not feature high on the list of most indebted countries in the world, it is ranked 1^st in Asia.  Though the debt ratio has declined from 71% to 68% in 2011, it is still high compared to its Asian peers.

General government gross debt ( % of GDP)

Source International Monetary Fund, World Economic Outlook Database, April 2011

The amount of India’s outstanding debt burden is expected to increase by 10.7% to Rs 43.5 lakh crore by March 2012 on account of high levels of market borrowing. Outstanding debt liability of the government would rise from Rs 39.3 lakh crore at the end of the current fiscal.  The main reason for rising debt is higher crude prices. At present almost 80% of crude oil demand is met through imports.

Also the problem of fiscal deficit continues to worry the government. It has estimated target of 4.7% for the fiscal year 2011-12 which looks as a significant challenge. India’s fiscal deficit in April-June quadrupled on-year to Rs 1.62 trillion from Rs 401.96 billion in the same period last year, as per the latest government data. The buildup of public debt as a result of large and rising fiscal deficits is not a good sign.

Rising inflation and higher interest rates coupled with global slowdown have caused worries. On account of the moderation in industrial output, the government also lowered its GDP growth projection for 2011-12 to 8.6% from the earlier estimate of about 9%.

While the government is taking steps to tighten the expenditure, corruption and politics (for eg : it is advisable to reduce the fuel subsidy, however it is not done on account of political pressure.) are hampering the measures.

While India has strong growth prospects, care has to be take to restrict debt levels as in times of slowdown, interest payments becomes a problem. Also debt increases the interest burden in the budget and restricts the government to take measures as seen in case of Fed. Hence the need of the day is proper fiscal prudence and governance. Currently S&P has given India a rating of BBB-, the lowest investment grade. In order to improve the grade, care needs to be taken to reduce or constrain the growth of debt

The market has shown extreme fluctuation for last couple of months. The volatility has increased in last few days after Standard & Poor downgraded US credit rating from AAA to AA+ and warned to downgrade further to AA if the situation persists.

This has created panic selling in American and European markets leading to the same fear in Indian stock markets as well! Media is also not helping making sense of the recent events. Few analysts suggest investors to buy; few warn that the bottom is not yet reached.

In such a situation what should the investors do? How can he or she cut through the noise and listen to the right voices and make an informed decision? We will discuss few points in this article.

Remember the fundamentals

No matter how markets behave, the fundamentals remain the same. Equities are still the best bet in the long run. There will be a short term fluctuation in the market but equities will outperform all investment assets in the long run. We tend to forget this fundamental principle in the time of unusual market reaction.

Don’t forget the asset allocation. If you have taken care of asset mix in the first place, you will not worry much about the market volatility.

Right time to buy at reasonable valuation

This kind of situation creates opportunities for investors to own good blue chip stocks at reasonably favourable valuation. Usually, blue chip stocks are almost always fairly priced or overpriced. We seldom get a chance to buy them at a fair price. This volatility has provided the right environment to own a few good stocks in the long run. In last few days, the sensex PE ratio went down to 17. If you look at individual stocks in sensex, you will find few stocks which are a good bet.

Remember the difference in making good returns and great returns is when you buy it. Investors who buy stocks when the market is volatile and down usually make great returns.

Indian story is consumption led

Let’s look at the Indian economy. Our economy is based on domestic consumption which will remain as it is. The export, while an important part of the economy, doesn’t have decisive power to alter the economic fortune of India. This means the global disturbances will have limited impact of the growth of Indian economy. Moreover, the commodities prices may come down because of slow recovery in the United States and Europe. This will let people save more and thus invest more.

Emerging markets have positive long term outlook

India, China, and many others have positive outlook in the long run. While America and Europe still impact world market, their influence is going down rapidly. We have already seen the 2008 crisis – how India was able to withstand the financial turmoil in developed countries and was still able to clock a growth rate of 6.8% at the height of recession in developed economies.

The investors should not panic because of market reaction which is very short term. If you own good stocks with sound businesses, hold on to it. If you want to own good stocks with reasonable valuation, go for it after you do your study.

Lastly, remember that investment is only for the long term. You may have started investing in the stock market very early in life hoping to reap the benefits when you are ready to invest in other assets like a home, for which the returns from your equity could help you pay a hefty down payment for your home loan, thus saving on the total interest cost of your loan.

In times of market turmoil, don’t lose focus in panic,  stay invested keeping in mind the fact that there will be short term fluctuation in returns but in the long run, your investment will provide better returns.

Is it time to panic or is it time to smile? Depends on which side of the wall you are in. If you are a contrarian, sitting on cash patiently for this day to come, you have reasons to rejoice. But, has the day arrived?

To consider this the opportunity we need a short term bad news and a long term good news. That is how markets are timed (if at all they can be!).

So here, we have a short term bad news.

Standard & Poor rating agency downgrades US T-bills from AAA to AA+. This by itself is not the problem. US has been having its troubles for a while now. This downgrade is more likely an acceptance of the fact that US is in trouble. But look at this – US owes India close to $41 billion dollars (and China almost 3 times that amount, if that is some consolation!). Not that we fear that US will default on its payments, but this for sure changes the risk profile. Already RBI has raised its repo rate last week and now, foreign money gets more expensive! The hedge opportunity is lost. Highly leveraged companies will feel the pain and that will sting. Bad corporate results could be expected in the next few quarters. So there you go market – Hashaaa, busshaa all fall down!

Now, the long term good news

Except for our export markets’ exposure to Europe and the US, we as an economy are fundamentally fine. Demographically we are compelling, a potentially high growth market. Goldman Sachs upgrades India rating. (If you can panic at S&P’s rating, why shouldn’t you party for GS rating?). Our exporters have learnt to live with the US in recession for a while now. As for the higher interest rates, yes that is worrying. However, the hay days of cheap loans are over. A home loan or personal loan has become more expensive for the common man!  India Incorporation will learn to accept this and work their way around this too. This too looks fine in the long term.

Beware! The eternal fight between the fundamentalist and the technical analyst rages on. You will keep encountering reports that say, ‘if market breaches this level then the next support level is a few thousand yards down there’ and so on. Fundamentals can all be gung ho, but it is sentiment that rules the market. Nobody wants to lose hard earned money to madness. A retail investor is worried about inflation. To him the fixed deposit looks very attractive. He may stay out of the market. And this may make the recovery slower.

So what should you do?

If your time frame is a good 10 – 15 years, then you should look at gradually investing and be fully invested in about 8 – 12 months time in the market.

There are still some amazingly solid companies now trading at attractive prices. There are a few zero debt companies and a lot of companies who don’t wake up with the expectation that an American will loosen his purse today. They are your best bet.

This is an opportunity no doubt to invest in both equity as well as debt instruments. If we are to expect the RBI to get more benevolent in the future and stop increasing interest rates further, then the high interest rate days would be gone soon. So, rebook your FDs at current rates and keep watching. Happy investing!

There is a lot of buzz being generated all over the world over the debt-ceiling issue of the US of A. No day goes without a front-page article on the issue. This article tries to give you a basic understanding of the whole issue and gives insights into the Indian scenario too.

What does the debt ceiling mean?

In simple terms, it is the maximum amount that the government can borrow to fund its day to day functioning. The current debt ceiling is at 14.294 Trillion dollars. This means that the US Government cannot borrow more than this limit without the permission of the congress.

So what?

Today the US is faced with a situation where it does not have money to repay its debtors nor to run the day-to-day expenses of the Government. This means it has to borrow to keep the ship running. However, since it has already used up the limit, it is in a quandary. Borrowing more means more debt, not borrowing means defaulting on payments!

Why has this happened?

It all boils down to simple math. Spend lesser than what you earn. But in the eagerness to get the economy’s growth boosted, the US government has borrowed more and spent more. Correspondingly the income/revenue has not risen.  A few of the reasons are the increased expenses for the wars that America is fighting in Asia and also cutting taxes for the super rich.

What is the way out?

A very practical way out is to cut total spending so that the gap between income and expenditure reduces and the government does not need to borrow. Nevertheless, this is a very tricky situation as trying to cut spending means taking the risk of depressing growth!

The only other way is to borrow more and stay afloat till the effects of expenditure cuts trickle down or incomes increase.

The India Story

The Indian government does not have a debt ceiling in a manner of speaking. Rather the annual budget sets a target on the fiscal deficit. The target for 2011-12 is 4.6% of GDP (Gross Domestic Product). This means that the government can spend 4.6% of GDP more than what it is going to earn as income.

Recent estimates have pegged the Indian GDP at Rs 90 Lakh Crore (approximately 2 Trillion USD).

Current Indian debt is around 40 Lakh Crore (aprrox 0.9Trillion USD)

The current budget has estimated income of Rs 10.5 Lakh Crore and Expenditure of 12.57 Lakh Crore. A deficit of around Rs 2.07 Lakh Crore (0.05 Trillion USD).

The above numbers mean that India has borrowed an amount equivalent to close to 45% of its GDP or to put it in other terms, the Government of India has borrowed 4 times its annual Income. However, its expenses exceed income meaning that every year the outstanding debt is only increasing.

So why is no one worried?

The funny part is all of this has to do with the play of words! Although when we calculate in pure numbers we calculate deficit as (income-Expenditure) but when quoting it as a percentage the Government talks of it as a percentage of the GDP, which is a much larger number, and hence the deficit seems less (4.5%).

The actual deficit is 2.07 Crore divided by Rs 10.5 Lakh crore or close to 20%!!!

Food for thought? We are not in a great situation either. Where is the government going to find money to repay its loans when it does not have money to run the daily show!

Moral of the story: How imprudent would it be for a common man to take a personal loan to repay the EMI of a home loan! Likewise, although one of the fundamental rules of debt management and financial management dictates one to avoid borrowing to repay another borrowal, most governments have ignored it. The US is facing the heat. India is not far away from facing the heat either!

Nifty and Sensex went up the hill, they took along the NASDAQ and Hang-seng too, then Greece and Obama’s problems started and they all came tumbling down!

Ironical, but the Jack and Jill poem seems to hold true for what’s happening in the financial markets around the world. Every market seems to be tumbling downwards. So, what does all this hold in store for the common man?

The common Indian is already under pressure from rising inflation, investments giving poor returns,  extended home loan tenures, juggling more than a loan sometimes, and to top this lower salary hikes too!

So what does an amateur investor do in the current scenario?

Stock Markets

If you have just entered the market recently and are not holding any blue chip stocks it would be a good thing to exit the market and wait for prices to stabilize. All the indications are that things are not going to be Rosy in the very near future. And if you are not a seasoned investor, the current scenario can make you jittery. If you are mulling entering the stock market now, please wait for things to stabilize.

Commodity markets

All the indicators are pointing to a direction where industrial production is showing a negative trend. Even the Finance Ministry has said that the earlier projected growth rates of around 9 might be a distant possibility. In such an environment it is better to shy away from the commodities market as they are directly affected by Industrial Production/Growth.

Derivatives

For a person entering the financial markets for the first time, very basic products itself take a lot of time to digest. Derivatives are always a challenge as even experts take a lot of caution while dealing in the complexities of the same. Given a traumatic market condition and a hazy outlook across the globe with regards to the future and what holds for the Global markets (the American Market and what’s happening with the US debt situation has shocked every single expert worth his salt), it is a very bad time to enter the derivatives market for the amateur investor.

Sell your dollars

This does not seem to be a great time to hold on to the US Dollar. If you have the currency with you, try to sell it off as the exchange rates are indicating a weaker dollar in the coming future. Sell it now when you can get a better exchange rate.

So what do I do with my money? Where does an amateur investor invest today?

In the current situation there are two positive channels to move your money into:

1. Gold: Buy Gold in the form of Coins/Bars and stay put. Gold has been historically considered to be a safe investment haven when all other investment products are in a down ward trend. Every government across the world is trying to increase its gold reserves as they have become wary of a weak US Dollar taking them down in a slide.

This would mean that gold prices will see an upward rise. A word of caution: Be aware of the Global happenings and be ready to sell your gold when you get indications of prices going down.

2. Fixed Deposits: Bank deposits are also a great option now. RBI’s high rate policy has ensured that banks are offering higher returns on fixed deposits. And considering the strength of the Indian banking system, deposits are also a safe bet.