Alex M Thomas – Page 39 – Undergraduate Economist

Inflation: Is WPI fallible’

The textbooks define Inflation as a situation where too much money chases too few goods i.e. the purchasing power of money has decreased. Actually, only an increase in the general price level for a considerable period of time is called as Inflation in Economics. The 2 major causes are Demand pull factors and Cost push factors. The present reason for inflation to increase is owing to the increase in the global prices of oil which comes under cost push factors.

What is the WPI’
Wholesale price index or WPI is the measure for inflation in India. The government comes out with WPI inflation figures every Friday. The WPI presently consists of 435 items and it is dominated by manufactured goods which make up 63.75% of the index.

Current scenario
In 2005-06 inflation has been experiencing a free fall in spite of escalating crude prices.
Currently the inflation rate is about 4.6% which is clearly undervalued as when compared to the increases in the prices of goods and services. The prices of pulses, transportation has all increased considerably but the WPI does not seem affected much.

Components of WPI
In the computation of WPI, the 3 major variables are Primary articles (weight 22.0), Fuel, power, light and lubricants (weight 14.2) and manufactured products (weight 63.7). Manufactured products have always enjoyed more weight in the calculation of WPI.

Cause of worry
One reason is that, the prices of commodities are increasing due to the increased costs, mainly in transportation. But there has been no corresponding increase in wages. The people who are poor will find it difficult to live as they were living before the price hike.
The second is that, the retailers take advantage of this situation by hoarding up commodities, further fuelling inflation. And the third reason is that, services do not form a part of the WPI though its share in the GDP is 52%. Surprisingly, the WPI inflation rates are just hovering between 4.5% and 5%, which tells us not to worry. History has told us to take inflation rates seriously only if the rate crosses 8%.

Government reaction
The government has decided to reduce customs duties on imports of wheat and sugar in order to increase the domestic supply. The government wants to reduce inflationary pressures by mopping up the excess demand in the economy.

A paradox
Like mentioned in the beginning of this article, the current cause of inflation is an increase in the global oil prices which is a cost push factor. How can the government be so blind in not seeing this’ Instead it has gone to the extent of giving duty free imports to reduce excess demand in the economy, when there has been no excess demand!

Remedy
The immediate step to take will be the reconstruction of the WPI so that it indicates the genuine level of inflation. Like our outdated poverty line, which tells that only about 26% of the Indian population is poor, the current WPI is also outdated.

References
1)http:/indiabudget.nic.in
2)http://economictimes.indiatimes.com/articleshow/1502544.cms
3)http://www.flonnet.com/stories/20060714001704800.htm

Indian Stock market: The basics

I am writing this post because two of my friends wanted me to. I will be just dealing with the Secondary market in general and the BSE or SENSEX in particular.
The Financial market in India is broadly divided into
1) Money market- for short term money
2) Capital market- for long term money
Money market consists of the Treasury bills, the call money market etc. I won’t be going more into it. Coming to the capital market, it’s further classified into
1) Primary market
2) Secondary market
The primary market deals with the Initial public offerings (IPO) or sales of shares by companies to the public for the first time. The recent IPO’s that took place in BSE can be viewed here. Once the IPO’s are completed all further transactions of the sold shares take place in the secondary market, more commonly known as stock markets or as bourses (jargon in finance). The major stock exchanges in India are the BSE and the NSE.

The National Stock Exchange or NSE was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. The NSE’s index is known as S&P CNX Nifty which is a 50 stock index which covers almost 25 sectors of the economy.
Bombay Stock Exchange Limited is the oldest stock exchange in Asia. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The BSE’s index is the SENSEX which is a 30 stock index. The SENSEX is an acronym for Sensitive index of the BSE.

Current scenario
The price of shares/scrips is fixed in the market by the invisible forces of demand and supply. When the purchase price is more than the selling price, the prices of share rise i.e. if A wants to sell a TCS share at Rs 40 but B is willing to buy the share at Rs 45, then automatically the transaction is carried out by the computer, and the price of the share increases.
The regulator of the Indian capital market is the Securities and exchange board of India (SEBI). It makes sure that the small investors are not cheated and ensures transparency of the transactions.
Recently, our markets witnessed a drastic fall, owing to the pull out of the foreign institutional investors (FII). The recent Mumbai blasts have also affected it.

My views
The investors in these markets form consortiums among themselves such that, a group of these investors are able to make changes in the overall market indices. FII’s are one such group. When they think, the time has come to book profits; they take up a selling position. This causes the market to fall and when the market falls, these groups again buy the shares; thus making profits again out of their buying back the shares. This phenomenon is possible only if the group’s transactions can exercise a considerable influence in the concerned market.
Market sentiments play an increasingly important role in the fixing of share prices. News such as decrease in interest rates, good rainfall, etc promotes investment thereby raising the price of the indices in the process. But bad news such as a bomb blast or an earthquake quake the investors see, thereby lowering the indices. The reasons for the markets showing a buoyant face during good news in understood clearly. A reduction in interest rates, promotes cheaper borrowing, thus facilitating more investment. While a good rainfall increases agricultural production, which has an impact on the various industries which make use of agricultural inputs. But, during a bomb blast, what I believe happens is that, investors (very much attached to their money) tend to sell. Game theory helps in explaining how the investors react. The typical example of game theory is that of the prisoner’s dilemma. When an investor hears a bad news, he thinks that other investors will pull out their investment owing to increased need of contingency funds. When all the investors think alike, a large scale selling occurs. I classify it as a typical group phenomenon, arising out of an individualistic tendency.

Some related information
There are other financial instruments in the market known as the Mutual Fund (MF). They are specialised institutional investors who mobilise funds from the public and invest in the capital markets. The people consider investing in such MF’s less risk than shares. It is a booming market but has not utilised its full potential. MF’s are a good option for those investors who do not have time to make a detailed analysis about the economics of the capital market.
Recently investment gurus have been stressing the importance of commodity markets. They are gaining importance in the Indian market.
Some economists and finance analysts believe that when an industry is overvalued, a correction takes place. Say, if the asset prices are increasing but the intrinsic value has remained almost the same, then a bubble is said to occur, which is sure to burst in the near future. Likewise, some believe that the Indian markets were overvalued and the recent crash which occurred was just a correction.

Indicator’
In the previous months, we might all have come across the headline that Indian economy is booming with the stock market touching its record peak of 12,000. The market indices are just indicators of the investor’s confidence levels and the business enthusiasm levels. We should not view the markets in isolation and say that the economy is doing well.

Jargons used
Bear- a selling spree where the prices are falling
Bull-a buying trend with rising prices
short & long position-you can view it here
Bourses-stock market

Hope this post has been of use to my friends and others. If you have liked it, please do let me know in my comments. If you have any questions or clarifications, do let me know.

For the High School Student ‘ A Career in Economics’

What are you going to do after studying economics’ This is a common refrain. One does not ask this question to someone who is studying Medicine or Engineering. Why’ ‘ Because the answer is obvious ‘ one becomes a Doctor or Engineer! Well after studying Economics, one can certainly become an Economist, but the truth is that the vast majority of students, who join for the BA Economics, do not pursue a career in Economics. Many serious students view the degree only as a stepping stone to the Civil Services. Like in other spheres of education, after a basic degree, one can specialize in various branches of economics too. The options include monetary economics, fiscal economics, international economics, development economics, labour economics and so on and so forth. With a degree in Economics one could become an actuary, financial analyst, investment banking analyst or labor relations specialist. Various employment opportunities exist in international organizations such as IMF, IBRD (World Bank), UN, etc. However my personal feeling is that none of these jobs give as much satisfaction as being a pure economist pursuing research.

What is there to study in economics’ (A common question which all those who study economics at school level have!). From my exposure to Economics at school, I thought that this involved only a lot of theory. I was really surprised to find that I was terribly wrong, for I soon came to know that the subject is in fact all about mathematics! So if you have a deep hearted liking for Economics make sure that you like math or start liking it before it’s too late. I have come across students who were desirous of studying Economics, but then changed to other subjects, due to their lack of knowledge or apathy toward math. One reason for this is that in school we have no clue to as to why a lot of set theory, binomial theorems, calculus, and coordinate geometry are taught! Actually these topics are used quite extensively in Economics too. There is a lot of statistics involved too. Generally the teaching of economic theory at the Plus II level is sufficient, but there is inadequate emphasis on Math as applied to Economics. As you progress in Economic studies there is a substantial increase in math. Therefore keep in mind to take up as many quantitative math papers as possible during your Undergraduate degree course in Economics. This will ultimately help you in your quest for the highest degree in economics, namely a Doctorate degree. The alternative is to take a Bachelor’s degree in mathematics or statistics, and then proceed to an MA/MSc Economics degree before a Doctorate in Economics.

Even in the present day, the trend among most students in South India, is to try for a seat in either Engineering or Medicine. Hence there is a clamour for seats in the science stream at the Plus II level. Consequently there is great pressure to obtain a high percentage of marks in the Class X, Final exam so as to obtain admission to the Science stream. Generally admissions to the non science do not require such high marks. Therefore it is usually the students with relatively less marks (which can by no means be equated with less ‘brilliant’) who opt for the Arts and Commerce streams. This is the dismal reality! I for one would like to see more toppers in the School finals opting for Economics!

What is the HDI’

The human development index (HDI) is a composite index that measures the average achievements in a country in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary and tertiary schools; and a decent standard of living, as measured by GDP per capita in purchasing power parity (PPP) US dollars.

Importance
HDI serves the following purposes.
‘ To capture the attention of policy makers, media and NGOs and to draw their attention away from the more usual economic statistics to focus instead on human outcomes. The HDI was created to re-emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth.
‘ To question national policy choices – asking how two countries with the same level of income per person can end up with such different human development outcomes (HDI levels). For example, Viet Nam and Pakistan have similar levels of income per person, but life expectancy and literacy differ greatly between the two countries, with Viet Nam having a much higher HDI value than Pakistan. These striking contrasts immediately stimulate debate on government policies on health and education, asking why what is achieved in one country is far from the reach of another.
‘ To highlight wide differences within countries, between provinces or states, across gender, ethnicity, and other socioeconomic groupings. Highlighting internal disparities along these lines has raised national debate in many countries.

Drawbacks
The HDI does not reflect political participation or gender inequalities. The HDI and the other composite indices can only offer a broad proxy on some of the key the issues of human development, gender disparity, and human poverty.

HD Report 2005
The US has been given the 10th rank, China 85th and India 127th rank. China and India falls in the category of medium human development while US in high human development.

Conclusion & suggestions
We have a long way to go in the path of human development. With more than 50% of population poor, we really have a long path. The government needs to put in more funds for developing backward areas and it has to seek the help of the private sector in this development process. Only a development process with public private partnership will be successful. India needs to reform its education sector mainly requires more qualified teachers who have to be given adequate remuneration. The current wages for teachers need to be revised. Education is an important tool for enhancing growth in a country and also the most efficient way.
For sustenance we need proper health care centres and good hospitals and medical colleges. We need to have efficient and innovative pharmaceutical companies who should be willing to reduce the exorbitant rates of medicines.
To enable connectivity, proper transport must be readily and cheaply available. Roads must be well laid and rural connectivity must be specifically implemented with haste.
The central, state and the local self governments need to work together to achieve high rates of human development and growth!

References
HDR 2005