2012 – GD/PI CAT Session 3 (Economics for Engineers)
First of all a big congratulations to all of you. You all are here because you all have scored a great percentile, gotten a lot of calls, so you know 80 %, more than 80% of the job is actually done. It is just the last short lap. Which is also even easier now, if you look a few years back, you had GDs as well as PIs right? In most places. Now most of the institutes, all of the IIMs, have actually eliminated GDs. GD is in some sense, the worst part of your en…, used to be the worst part of the entire process, because a lot of it is not in your control. For some institutes you will still have GD. So we will do how to handle these situations and how to do GDs as well. But for places that do not have GD, see GD is very uncertain because there might be an idiot in your group who just decides to keep shouting all the time and does not let anybody else speak. Right? It is completely out of you control. You might know the topic very well; you might have a lot of good things to say. But you can’t just control this random person in your group. Right? So essay eliminates a lot of that. All that you really need to write an essay is that you should know the topic. The downside of an essay though is that you should really know the topic. Right? Because in a GD in a way is good you can just keep quiet, one minute listen to what everybody else is saying and then paraphrase it and start saying. Or you get a hint of what is happening and hence you can start talking. Right? That’s one thing in an essay. So, from a prep point of view, in an essay it is more important that you are actually abreast of all the events, you know the topics, you know certain jargons. You might sometimes get some essays or even GD topics that actually use terms that you don’t understand at all maybe. Right? So, in such cases, it becomes difficult in an essay, you almost have to leave a blank page and come. So hence from that point of view an essay requires more preparation. But there is very little uncertainty, so my point here was not to scare you. The point was the say essay is actually a good thing to happen; it’s much easier, it’s entirely in your control, if you are prepared, you know the right things to do, so you can very much crack the essay. So what is important across these three things, be it a GD, be it a PI, and be it an essay. Is that all of the points you make, important to, when you are preparing, so what should you look for. There are a hundred topics you read through topics, if you didn’t read the newspaper you will now start reading the newspaper. Right? Its I hard to read economic newspapers, because they typically use a lot of jargon, the kind of phrases that they use you really don’t understand. Right? Given the fiscal pressure do you expect P.C., P Chidambaram to bat for growth? Now, if you read that as a first sentence, you will say shit forget that, let me pickup some other newspaper. So the idea of today’s session is to give you a broad understanding of some these terms that get used. Let you understand the events that are happening. Better so yourself when you try to read newspaper, understand at least part of what is happening. Right? So the point I was trying to make was, in all of these three, what is important is to know facts in terms of, when I say facts both examples and numbers. Right? Even when you are writing an essay, in an essay you are expected to write opinion about a topic, it should not be baseless opinion. The opinion has to be based on certain facts. So you either give an illustration, you give an example of some event that happened, that relates to the fact. Or you give numbers, statistics, and proof that a particular thing is right or wrong. Right? So for example in the recent past we see a lot of uproar in the country over all rape cases that have happened. Right? And we have had people from the west saying that oh Indian society is morally to be questioned e.t.c. now, if you actually look at the statistics the number of rapes that, ….. , we are not going to get into that topic, maybe we will look at the topic later. The point that I was trying to give you here was, the number of rapes that happen in the US is about 10X that happened in India. In absolute numbers. If you divide that by Indian population the ratio is about to 25 and 30 times. Right? So, it’s not that Indian society is for example morally down trodden, the way they are making it out to be. Right? So the point here is that when you are writing an essay if you are able to such a statistic you are able to quote such an example, the point you are making the opinion you are expressing has far more value. Right? So while you are preparing, so you will at least read newspapers in the run up to the interview. Next couple of months you are going to read. Right? What should you look out for try to look out for numbers, statistics and illustrations? Right? So suppose you are talking about, let’s say there is a topic related to Fiscal Deficit in retail, another very hot topic in India Right? so if you are able to give examples of Fiscal Deficit s in other sectors and how they have helped or Fiscal Deficit and retail in other countries and how it has helped. Or retail it in other countries like how Wal-Mart has probably harmed the pop stores in US and so not Right? so if you are able to quote specific examples then your entire essay all the opinions you are expressing have far more weightage, than just writing text. What you should try to take away from not just this session but every subsequent preparation that you do, is try to remember examples and numbers. Right? So mark out these things. These are the things that you should look out for. So we are going to focus on economics today. Largely understanding what different terms mean and everything in the current context. Right? there is no point; it is not going to be a theoretical lecture on economics Right? that’s not useful at all, from your perspective. Right? what we will try to do is understand the various terms in the current Indian and global context. Right? So before I, we start that lets know how much we know. What is the India’s GDP? The reason why a lot of you, most of you will know what is GDP growth is broadly. Right? but a lot of you don’t know. This is the norm. there are two norms to it. There is something called nominal and PPP, I will come to that. But, what a lot of you get confused with, what’s get talked about always is GDP growth, so this is GDP growth. It was 5.5 % in first quarter of this financial year. Which is basically April to , April, may and June of 2012, the numbers are not yet out for second quarter either, so second quarter numbers should be out in next 10 days. So that is the GDP growth that is basically the year on year rate at which GDP is growing. That is what gets talked about most that is what is foremost on the finance ministry’s agenda and hence this is the number that you hear the most. The actual GDP is about 1.8 Tn dollars. This is called GDP at nominal exchange rate; we will talk about exchange rate in details later. I will tell you what nominal is and what PPP is. The number closer to the 5.5 number that some of you guys were quoting is 4.4 Tn, which is at the PPP exchange rate. So this is GDP so most of the economic story everything revolves at the end of the day around the GDP, which is why I was just asking to see if you all know what is India’s GDP. So, that is India’s GDP the growth has been 5.5% in the first quarter. Right? expected to end at similar max of about 5.8% maybe by end of year. Thing is what is India’s rank in the world. 9th or 10th, not bad. Different sources, 9th most sources quote. CIA quotes 10th but world bank, U.N., and IMF all quote it as 9th. Right? so it is the 9th largest. So now when you say this 9th largest it is in terms of nominal exchange rate. If you take 1.8 Tn, if you take the GDP at nominal exchange rate then it is the 9th largest. Right? who is the largest? US. Second? China. Third? Japan. Fourth? Germany. Fifth? France. Sixth? Brazil…UK, Italy and India. As long as you know India is 9, it’s enough. If you know it is always good but not necessary. Anyways in terms of nominal exchange rate, India’s rank is 9th in the world. What is the rank in terms of PPP exchange rate? Third only US and china are above India, Japan is slightly lower, Japan is 4.3 Tn. And in terms of growth what is India’s rank? India is, 35th; we are nowhere close to the top. We keep always hearing stories about India and China, the big emerging economies etc. and hence somehow we believe that China must be first and India will be second. Even China is not first. What is China’s rank? China’s rank is 9th. China is the 9th fastest growing economy. So you see India and China get talked about so much primarily because of the size. So in absolute terms or in PPP terms India is third. It is a very large economy. Because it has a very large population. Right? that’s broadly India and China together account for close to 40 % of the world population. That is huge. But they account for less than 10% of the economy. Right? So, because they are fundamentally such large economies they get talked about a lot. If you look at a few centuries back, if you look at the 16 hundreds, broadly the ratio of population was similar. That time India accounted for close to 17% of the GDP, china accounted for close to 33% of the world GDP. This was pre industrialization, pre anything happened. Before that the only way, ok first of all what is GDP? Gross domestic product everybody knows. What does GDP mean? GDP basically, yak some of you know definition and all so, that value of all goods and services produced in the economy. That is the definition. Think of it as a company ok. What is a company’s revenue? What do you call as revenue? Right? revenue of a company everybody understands? That is exactly what GDP is. Right? It is in some sense revenue of a nation. Right? It is the total value of everything that the nation does. Either what is manufactured or sold? Or a service that is provided. Right? So, that is basically GDP. So pre industrialization when there was no technology, the only thing to drive GDP was only population. Right? The more people that you had, the more you could produce. Right? And hence this was what India and China looked like. Today India is closer to 2-3% and china is close to 5-6%. Right? So together they account for less than 10% of the world GDP. They still account for the 40% of the population. The reason is beyond, after the industrialization happened. The industrialization touched only the west. So they improved technologically, productively, increased none of them really came to India and china. Which is why despite having a large population they still account for very low proportion of the GDP, but now that the world is getting flatter and technology is pretty much freely moving across, you can expect some time in the future, so nobody can really know the date. Right? So which is the fastest growing economy in the world? Let’s not all have fun, nobody will know this. It is Mongolia, so you will see that, in fact there was also a survey that economist did, this is little old, last year they did a survey. To find out in the last decade, from 2001 to 2010, which economies have grown the fastest? And there were 6 out of top 10 countries, these were all African countries. Right? The reason is the base effect; all of these have a very small base, so it is very easy to grow at a 17 or 18 %. that doesn’t mean anything. Turkmen is the second fastest growing economy. That doesn’t mean that suddenly everybody is going to go and invest in Turkmenistan. Right? It’s just a base effect, but India is fairly, but India has been fairly low last year. So, that is broadly where we stand. So, a few, not even a few, year – year and a half back it was very valid to compare India and china. Right? India and china were large economies both growing fast, both attracting large investors, both economic models, made a lot of sense to compare them, but now, china is still great, but India is doing really badly. So, first let’s look at India’s triangle. Things not going Right? So let’s think about, so what do you hear, if you read the paper or sometimes by mistake here news when somebody else in the house is listening to. What do you hear the finance minister talking a lot? Fiscal deficit. So one, ya policy paralysis is more a political guys trying to throw kichar on the government. But, fiscal deficit is, policy paralysis is not an economic term, okay, it is just the opposition trying to say that the government in not moving on a lot of policies that it needs to move on. Right? So fiscal deficit. We will come to all that. Typically, finance ministers concern, if you hear any finance minister giving the budget speech, right, and the budget will come now, a one and half month’s time. What you normally hear him talking about is growth, fiscal deficit and there is always this of inclusion in India. Right? Everybody has to grow together; it can’t be just a section of the population that grows fast and the other people that get left behind. So these are the three themes that you will normally see in every budget scheme. What changes is the importance that different things have. Right? So that for the last 4 or 5 years the focus been entirely on growth. Right? Most of the talks will be to growth, and most of the measures taken, most of the policies will be in some sense to promote growth, to help increase growth. But the thing this year at least so far in all these talks have been fiscal deficit. Right? This is the reason I said that Indian economy is really in a bad shape. Right? So he has been talking about fiscal deficit. No matter what happens, we will not actually let the fiscal deficit go beyond our target limit. Inclusion is always there in the entire scheme of things. We will come to each of these things in detail. Then the other important policy maker from the economic perspective is the RBI. Right? Or the central bank. In India’s case the Reserve Bank of India. normally the Reserve Bank of India will be worried about? What they are really worried about is inflation and exchange rate. Right? Those are actually, inflation has come in control right, recently. But the exchange rate is a huge issue, right. The rupee has been losing value very rapidly over the last one and half year. Those are the two things that the RBI really wants. I forget one small thing. The reason I was saying you know, India is no longer in a very good shape. I was just; I like to always do this, look at the cover page of the economist, right. The reason is that economist is the global magazine. It talks about all countries, so one word that gives you a lot of comfort, is to see that India appears fairly frequently. India is on the cover page of the economist quite a few times. But you see the story changes drastically. So until 2010 the story was this is not all the covers, there were many other covers where India featured. So there was whole journey where the story was, okay, will the Chinese drag in and it the Indian tiger and you know cool things like that, it finally then reached a point that, India will outpace china’s growth. Then there was that one more push in needed India is always referred to as this elephant, this giant economy but slow and sluggish, difficult to move. To now it’s actually come to whether India is losing its magic. Is India lost in search of a dream? Right? So this is the global, what this tells you, what the global outside world right, world outside of India thinks about or perceives India as. Right? So it is very interesting. Now most of the articles always talked about whether it is India or china. Both of them are very good was given. From there it has come to a talk of is India even good. Should we even be in India, should we even consider India? right? So that’s a huge shift and hence, a lot of focus is India vs. china more just on India alone. Right? These are what these two main policy makers are concerned about. Then there is everybody else. I will call it as industry, but it is everybody else, even you and me. Right? Industry, common peoples everything. So from a let’s say budget overall the economy what do you want? What should people want, I will tell you what Adi Godrej and Naina Lal Kidwai want. So, I will tell you why I am saying that. So, you typically want low tax rates, you want low interest rate so that borrowing is easy. Right? Broadly that. Right? From an economic point of view so now how do all of these get decided, so how does the finance minister or finance ministry control the growth rate, control the fiscal deficit, control all of this. So, all of the policies that the finance ministry makes, is all of these policies are called fiscal policies. Right? Fiscal simply means everything related to revenue and expenditure. Right? So all the policies that government as part of fiscal policies, are anything to do with the revenues that government will earn as well as the expenditure that the government will do. The policies that RBI makes are referred to as the monetary policies. Right? Now monetary policy means something that controls the money supply, the amount of money that is available in the market. Right? I will tell you how they actually control that. And finally there is no policy that the industry or the common man makes. Right? The only thing that happens in negotiations. So like before a budget, for example this Wednesday there was a meeting between all the major industry chambers, your —– FICCI, all of those and finance minister, to understand what the industry wants. So inputs are taken but obviously there is no policy making happening at the industry level. So these are basically the two makers of policy. We will understand how each of these is affected.
So let’s look at the fiscal policy now. The finance minister wants to control growth. Right? He wants to increase growth, because already investors are losing faith in the India’s story. He has to deliver a certain amount of growth. So how do you actually control GDP growth? Right? We can look at it simply in terms of mathematics. Right? Since as engineers all of us are comfortable with mathematics, let’s just understand how if you were the finance minister what kind of policy measures would you take to actually boost growth. Right? So how would you boost growth? What is GDP? So the simple formula for GDP is GDP = G + C + I +X + In, I will tell you what each of this is, it is very simple. This is G is nothing but Government spending – everything that the government spends, so these would include subsidies, these would include government investments in improving other things, all of that. All the government expenditure, all the major portion of this will be subsidies, but all of the government expenditure is what is. So see, actually we said GDP the definition of GDP is total value of goods and services consumed in an economy. Right? This definition assumes that everything that is produced is getting consumed. Right? Which is why everything that the government spends on producing is one this is all total spend by private consumers, it includes all the common people, both individuals as well as corporate. All private consumers the total expenditure by private consumers. I is the investments, and this X is basically the net exports, exports – imports, correct. Because when you count, this is just count total domestic consumption but actually GDP measures total production. So part of the produce is exported, that also needs to be counted and some of the consumption is actually from the imported goods so that needs to be subtracted out. Right? Fairly simple there is nothing complex about it. This is all you need now to see that if I want to increase GDP growth, right. Suppose you want to increase you GDP what do you do? You increase one of these four things or decrease the fifth one. The negative term you decrease all the remaining terms you increase. Right? Now every policy that you see that is made either as part of the budget or later, is to do one of these. For egg a few years back there was a huge emphasis on SEZ’s, special economic Zones that there were lot of tax concessions for people to export. Right? So they basically wanted to encourage private investors to actually setup factories targeting exports. Right? So that exports increase, that’s one way to increase GDP. Right? Similarly the entire IT industry had huge amount of tax breaks. Right? All of this was to promote greater exports, to increase exports. So everything that is done in budget every policy that actually comes out aims to do one of these. The moment you do one of these things the GDP will grow. Now this is simple the easiest to target is this. This is the easiest to target, just increase the government expenditure. Expend a lot GDP will increase, very simple. So what’s the problem? The government can do that, there is budget announcement, just announce spending in every sector. Because we don’t have enough money. Right? This is where the fiscal deficit comes in. so which is why these two are not entirely independent, these two need to be, managed together. Right? Growth is gone to come at some cost if we had infinite amount of capital it wouldn’t be a problem since we don’t that is the restriction. This is how the entire Chinese, this is the key difference between the Chinese economy and the Indian economy. The Chinese economy is exactly how I told you, all of you smiled at. They actually doing this. So all that do, it’s not a consumer driven economy, its completely government driven economy so the government spends a lot. It spends on doing investments, on helping exports, it is largely government driven. Almost no local consumption. Right? The entire Chinese economy is really focused completely on exports. Whereas the Indian economy, C would be the most important part of Indian economy. Indian economy is completely driven by private consumption, most of it is domestic consumption, and it’s all domestic production and domestic consumption. Which was one reason why India was not very affected by the entire crisis in the west. Right? Because the Indian economy was very less export driven, its more domestic consumption driven. So that’s the key difference. So ya so the way you formulate policy, or the way that everything the finance minister does or will now do in the budget will be to increase one of these things. So the way to increase government spending is the simplest. You just allocate more money like they did last year. Suddenly give a large amount of food subsidy. Because spending of the government comes in form of subsidies. Which is the largest subsidy? So food is actually the largest, then petroleum and then fertilizer. Those are the anyway three major subsidies. Food, fertilizer and petroleum, which is all you diesel, petrol everything. Right? That is the biggest place where the government expenditure comes. Now how do they promote but increasing the government expenditure beyond a point is not possible because they don’t have enough money. Right? We are already in a deficit. Second is consumer. So what can the government do to try and encourage consumers to spend more? what can the government do to try and encourage consumers to spend more? lower taxes. Right? There are two kinds of taxes- there is direct tax and an indirect tax. Direct tax is basically your income tax. Right? It is directly going out of your income, directly going out of your pocket. That is direct tax. So how does a reduction in direct tax actually help consumer to spend more. what it does is your disposable income, the amount of money you have available to spend increases. Right? If you are paying less in terms of taxes the amount of money you have increases and which is why you end up spending more. so that is one way we can increase private spending. Indirect tax is all you service taxes and all the other taxes; they are on the product set that you buy. Right? So if these taxes are lowered effective price of the product will be lower, and hence you will be more inclined to buy. So that’s the way they want to increase consumer spending. What could be the flipside of this? What is the flipside of trying to decrease the taxes? Tax that is expenditure to you is nothing but, this is the government revenue. So the moment you lower the taxes, the revenue to the government actually decreases and because of this, if you already have a fiscal deficit, that is they are actually spending more than they can earn. So they can’t afford to reduce their expenditure even further. This is why lowering taxes; there is a limit to which you can lower taxes, because it affects government revenue. There is however an interesting thing, that Chidambaram actually himself had done in 1997. The budget is still remembered, it is referred to as dream budget, exactly. What he did was massively lower the tax rates. So he lowered the individual tax rate to the 30 % they are at today and he lowered the, this is the maximum slab, and corporate taxes to 35 %. Before that it was at 40 %. Right? So he massively lowered this and what he actually did was, try to increase the base of people who are taxed. Right? Tax compliance in India is very low. So what he tried to do with the dream budget was drop the absolute tax rate. The way he ensured the government revenue does not get affected is by trying to increase the tax net. Trying to increase the number of people who actually pay taxes. And it actually worked out so before this budget in 95-96, income tax just your direct tax accounted for about 14 % of government revenue. Now, in 2011 it accounts for 18 %. Right? Which simply happened because the tax base increased, that is the number of people paying tax increased. Right? So while the absolute tax rate was lowered the number of people paying the tax increased. The other thing that the government tried to do in the budget before last is to move taxes from direct to indirect. Right? So they gave slight tax benefit in the direct taxes but they increased the amount of indirect taxes. Right? You don’t realize that much like all of us pay 2 % education cess. Right? In almost all the products we buy 2 % is not a huge amount, compared to the price of product you are buying so you don’t realize it. Right? And hence, and it is a compulsory compliance, nobody can evade the tax. Right? Because it is there on the product while you buy and hence typically compliance is much higher for indirect tax than direct tax. So the other thing that they tried to do is move from direct tax to indirect tax. So the way in 97 he tried to increase compliance not just in 97 since then over the years. one is there was a scheme called 2/6 scheme. This was basically who pays a tax, who qualifies for a tax, based on what they own. the biggest problem of tax compliance in India is business families. Right? Because there is no direct reporting of tax, they miss report the tax. So, instead to qualify for filing a tax, they looked at asset ownership. You own a particular type of car; you own a house of a particular limit and so on. Right? Then there was a thing, some other thing, that he introduced which was very interesting. Which is there even today. Is called STT- which is security transaction tax. It is actually a tax that you pay if you are trading on stock market. It is a tax that you pay on every stock that you buy or sell. On every transaction you pay a tax. And what he did against, he introduced this and he actually reduced, you have something called as long term capital gains tax. You have long term capital gains tax and you have short term capital gains tax. This he reduced from 20 % to 10 % and this he completely abolished. Instead of that he introduced this tax called this STT – security transaction tax. On every transaction it’s a compulsory tax. So there is no way to evade. It is very easy to evade these taxes if people want to. Right? You just don’t show the transaction, but, the indirect taxes of this nature are much more difficult to invade and hence the compliance is higher. That’s one thing the government has continuously tried to do reduce the absolute tax rate, but introduce measures to compliance. That is another thing that they did into details of it right now.
VAT essentially does is increase compliance and the new GST, Right? There is a lot of talk about GST- goods and services tax. That is going to further increase that, it is gone to build taxation and build the rate of compliance. That is one thing the government does on tax while it might reduce the absolute tax rate to try and increase consumer spending they will increase the amount of compliance so that the net revenue does not get affected. That’s on taxes.
On investment, again there are two kinds of investments. There is direct government investment and there is investment from consumers. Government investment is anyway direct budgeted by the government the government will just spend. How will they promote consumer investment, private consumers to invest? You have basically tax exemptions. Right? So we are talking about investments. One way the government promotes investment is tax exemptions even when they want investments directed at specific sectors. Right? Like there was a special exemption last year, over and above the 1 lakh limit there was an additional 20000 for infra bonds. That’s no longer there this year. Because they wanted to promote investments in infrastructure. Right? Through tax exemptions government not only promotes people to invest more, but also decide what sectors they want investments to come in. Right? That’s the way they would actually policy would help them increase or adjust GDP growth. Now, in normal situation last five years, entire focus has been on one of these three things. Every time in every budget you will find some tax exemption, some tax break, some change in tax structure etc to try and promote GDP growth. Now however like we said the entire focus is going to be more on fiscal deficit. So fiscal deficit definition is very simple it is just total revenue – total expenditure. Right? It is very simple the total money they are earning total revenue – the total expenditure the total money that they are spending. Basically this is the difference, in case of a fiscal deficit the expenditure will exceed the revenue, which was why this number would be negative, you call it a deficit, otherwise you will call it a fiscal surplus. So when there is a deficit revenue will be lower than expenditure, which is what is typically happening and this difference is typically funded by dept. so the government the takes dept from the other countries to fund the fiscal deficit. Now the fiscal deficit this year the limit, the target for end of year is 5.3 %. This is already higher, in the last budget when Pranab Mukherji presented the last budget, he committed to a target of 5.1 %, so that has already been increased to 5.3 %. This is what they are looking at analysts believe that it might even go higher up to 5. 8. But, Chidambaram in several statements has said that no it will definitely be constrained at 5.3 %. Right? Which is why the likelihood of tax breaks and other incentives is much lower, because the biggest focus is to try and contain this at 5.3 % this year and target for next year is 4.8 and finally they want to take it down to a 3 % level by FY 17. Right? So fiscal deficit is very key, because at the end of the day, this is what the entire crisis in the recent history that you see, except the US crisis. Right? Which was a mortgage problem. Other than that the entire crisis in history has actually happened because of too much fiscal deficit. The entire Euro Zone crisis, what was Euro Zone crisis at the end of the day. Because Europe was one single economic Zone it was very easy for countries to borrow from each other it was never treated as a foreign currency, was easy to borrow, hence they borrow very high amounts, they had a huge fiscal deficit which is why the entire crisis happened. The south east Asian crisis that happened in the late 90’s that was the same thing. In fact those fiscal deficit levels even if we achieve this, let’s say we achieve 5.3 %, currently we it is at 4.8 %. Even if I look at the 4.8 % it was just 3 % in 1991 for India. the biggest crisis for India happened during 1991. Right? Part of the fiscal deficit, this number we are talking about is something called as current account deficit. I will not get into the details of it right now; we will come to that in a bit. But, the levels of this deficit are actually much higher than what India was in 91 during the south east Asian crisis. the south east Asian countries most of them were around the range of 3.5 to 4.5 %. Right? That happened around 97. Our deficit levels are much higher than previous cases where the economies have cone into crisis. Right? And hence it is a cause for concern, which is why the biggest focus of the finance ministry is on trying and containing this fiscal deficit to remain at 5.3 %. The reason I say that they are not doing very well till now is until November, which is the latest number that’s available till November 2012 i.e. they have already spend 46.5 % of their planned expenditure. Sorry they had earned only 46.5 % of their planned revenue so till November i.e. only 4 months to go, right, 8 out of 12 months over, they have not even earned half of their planned revenue. Right? They should have earned 2/3rd s of their planned revenue, only 46.5 % of planned revenue was earned. The fiscal deficit in actual terms in rupee terms in November was already at 80 %, it was already at 80 % of the value should be by march, Right? Four more months after November, the latest figures available is for November. So very unlikely that it will actually be contained at 5.3 %. And if it does not get contained at 5.3 %, if it actually increases beyond this value, there is threat that India gets rated, India gets junk rated. This all of you might have read in the news. Right? Basically the rating agencies are likely to further downgrade India. the reason why India’s rating actually got lowered was less the fiscal deficit more another term called balance of payment, I will just come to that. This is why the fiscal deficit is important; this is why the government cannot focus aggressively on growth. Right? Now if you look at the first statement, right, which is what you read in most of the papers, some version of that, given the fiscal situation of the country the fm cannot bat for growth. It is at the end of the day a tradeoff between growth and fiscal deficit. Right? To promote growth you have to increase expenditure which means increasing your deficit, which is why the concentration more this year is going to be on containing the deficit rather than looking at growth. Given that this is actually going to be the last budget before the elections, right? So in the normal scenario the focus would be on all an all out on growth. Right? It would have been another term that you will hear a lot with reference to the budget is populist budget. Whenever you talk about budget you will hear these terms, populist budget, reformist budget and so on? What is populist budget? A populist budget is some budget that says that forget my fiscal deficit, I don’t care I am just going to go for growth. So I will give all kinds of tax breaks, I will basically make my consumer and industry very happy. I.e. is populist. Right? We will be more inclined to vote for a particular government that is giving you enough of tax breaks that is helping you addressing the two needs that you had. Right? In the first page what the industry or the common man wants is lower tax rates and lower interest rates. Right? Interest rates anyway the budget doesn’t decide, the RBI decides that is not political. So this is in nobody’s hand. So all that is there is the tax rates that is a populist budget. So ideally the last budget before the election would in normal circumstances be very populist. But this one is not likely to be because fiscal deficit is in a really bad shape. Reformist is one you always encourage reforms like the budget in 1991 was. When we actually allowed foreign investment to come into the country. Right? Which improves laws to make it more free economy, to make free trade more easy. Which moves it towards market economy, i.e. a reformist budget. Right? Fiscal deficit , this is the key concern 5.3 % is what we are targeting, looks very very difficult to achieve, which is why the planned expenditure, see part of this expenditure is planned part of this is unplanned. The expenditure increases. So in this budget the planned expenditure is expected to increase by just 5 %. So it is expected to be around 5.47 lakh crore last year it was 5.21. so very small increase planned while last year compared to the year before that this was basically 12-13, this is what is expected for 2013-14. This is not an actual number. This is what is expected. The actual number will be known only on Feb. 28th right? When the budget is actually announced. So last year in 2012-13 compared to the previous year it increased by 22 %. This year the planned increase is only 5 %, because that’s the only way they can control the fiscal deficit. Right? It’s already very high. There is already so much that they can increase revenue by, they cannot increase taxes even if they don’t decrease. So, the only way to do it is to try and curtain expenditure. Right? This is actually the negative growth in some sense. The inflation currently is at a, its lowest, right, in December 7.4 %. So if you see, and it be higher than 7.4 in the last 12 months. So if you are planning for growth which is less than inflation it actually means that in real terms it is negative growth. The same amount of money, because the inflation is 7 %, the same amount of money can actually buy lesser than what it could buy, right? See in simple terms let’s say, first my planned expenditure was hundred rupees the cost of certain goods was 100 as well. Now I have planned to increase my expenditure by 105, but my inflation is even if I take it as 7 and half, the cost of these goods has become 107.5. so now this money cannot help me buy these goods, right? So actually the expenditure that has been planned is less than last year. Though in absolute terms it is larger, in terms of the amount of stuff it can help you buy is actually lesser. Right? Because its lower than inflation. And hence even if GDP growth you will hear two terms nominal and real. The 5.5 % growth we were talking about is the real growth. Nominal growth doesn’t make sense at all, real growth means I take GDP this year suppose my GDP this year was, suppose I produced 5 units, suppose I produced 1 product, let’s take a simple example. The entire country produces one product only, it produced hundred units of the product this year and the cost was Rs 10 per unit. Right? So the value of the products was 1000 correct? Now let’s say next year we produce 105 products, but now the value per unit of these products is 12. Okay. Let’s say instead of 10 it is 12. 12.60 is the actual value of my goods. Right? 12.60 is the actual value of my goods. So, what is the growth? Its 26 %. But most of this growth is coming because of inflation, right, because the value of goods has increased. That is why when you take real growth rate you don’t change the price. You keep a base year which is considered as 2000-01 whatever. You assume the base year keep the price constant and then see what it is. So the real growth is 5 % which is just the growth in the actual volume of goods that are producing. Right? That is what the nominal GDP means. So the 5.5 % that we talk about is the real GDP. You will always talk about and compare the real GDP. Because otherwise the inflation, it doesn’t matter any base you take it remains at 5.5 %. Right? Both of these numbers are 10, instead of this if I take both these 12, it will still be 5 %, Right. Will be 5%. If I take both these 5 it will still be 5%. So, whatever the base here, right, it is a constant base here; whatever you take as the base here it will be the same. So this is the real GDP, nominal will be much higher, those of you are interested if you do 1 + real into 1 + inflation you will get nominal and GDP growth rate – 1. (Nominal = (1 + r) (1 + I) – 1). That’s not important; you don’t have to worry about all that. All you need to know is that this is the real GDP and not the nominal GDP growth rate that we are talking about. Right? The point that we are making is that as expenditure increase, is actually even lower than the inflation. So, actually a – ve growth we are planning to spend less next year than we did this year. And the reason for that is the high fiscal deficit + there are going to be telecom auctions, now, which are not expected to raise as much money as they were expected to rise. The prices will get settled about in three weeks time. Keep a track of that particular news; it would be the most current when if your essays or interviews happen. So, if you are planning to actually raise another 20000 crore rupees through that, because of this. So all of this says that fiscal deficit is a huge constraint currently for the country which is reflected in everything the planned expenditure next year, the additional borrowing + the more emphasis on reducing fiscal deficit compared to growth. Next that was what was broadly on the finance ministry’s agenda.
Lets come to the monetary policy. Right? That was broadly, fiscal policy see inclusion gets included in all the subsidies, that is why no matter how much less expenditure you plan there has to be a minimum expenditure planned for to account for the subsidies. Now, the RBI is worried about controlling the inflation and exchange rate. So how do you think inflation is controlled? How does the RBI control the inflation? Ok. First we start with what is inflation? Right? Inflation is increase in the prices, right? I.e. simple, but why does inflation happen? Basically there is a mismatch. It’s not necessary that the demand increases; there is a mismatch between demand and supply. Ok whenever there is a mismatch between demand and supply either demand increases too much or supply decreases beyond a point. So, what basically happens is given a particular demand and supply in a normal situation, the entire demand will exactly match supply, a particular price will be set. Now if the demand increases beyond a particular limit, the prices will increase, right? That is what inflation is. Now, in case of India the key concern of the RBI is trying and keeping inflation low. Right? May not be, so, but we cannot make a flat statement that no inflation is good. You cannot always say that low inflation is good because there are economies like Japan which have actually been in a state of deflation. The prices have been dropping for the past couple of decades. They have actually been in a state of deflationary condition. So, there the key worry of the central bank is actually to increase inflation. Why do you think? Low prices is always good, right? Why do you think people will like to increase inflation? Why is deflation bad? Basically what happens is deflation means there is no demand, if there is no demand there is no production, if there is no production and consumption your GDP cannot increase. So your GDP will stagnate or will start to go in a recession mode, will actually start dropping. Unless you have a particular amount of demand, so having certain amount of demand is healthy. So 2-3 % inflation is necessary for the economy, right? Otherwise there is no incentive for a manufacturer to set up a plant to manufacture goods, to produce and sell. Right? So, either excess demand or less supply either of these can cause inflation. Now, how does the RBI manage to control inflation? It cannot control either demand or supply. Can it control supply? A particular commodity is produced it can be supplied, really it can be sense, let’s say car, ok, can it control what Tata, Maruti all of these guys produce. Nor can it control whether you and I want to buy a caRight? No. so what does it really control? And how can the RBI do anything about either demand or supply? All of you know interest rates because everybody must have read in the paper right now the inflation is at a 3 year low we expect the RBI to drop the interest rate by 25 bases point. Right? All of you must have read that. So, that you know that it has some link to interest rate. How does interest rate help either demand or supply? So, let’s say if the interest rates are low, ok let’s consider a condition where the interest rates are low. Let’s try to figure out whether inflation will increase or decrease, if interest rates are low, it means that money, let’s take the example of car again. If interest rates are low, that means the rate of interest on a car loan is low. Right? So, there will be more number of people inclined to take a loan so the demand will increase. Correct? More people can afford a car; more people are inclined to take a loan, because it’s a low interest rate. The supply remains pretty much the same; the supply doesn’t get affected too much. See actually the interest rate also affects supply, one can argue that interest rate is low it is easier to borrow money, start a business, produce more. Right? But all of that is very long term activity. I cannot suddenly start producing more in 10 days. Right? There will be more people willing to setup a plant 5 years down the line there would be more supply, but it won’t have an immediate effect. So, the immediate effect is really only on demand. So, the demand increases, supply pretty much remains the same, which means that the inflation will increase. Because more people want to buy, the number of cars available in the market are same. The number of people who want to buy are more and hence the price goes up. Right? So the people are willing to pay more now to get that particular car. Right? The same case as in a movie hall when nothing else is available; the only food product that is available is being sold there. The same bottle of water will be priced at 2 X and you will still go ahead and buy it. Right? There is no choice. That’s the only supply that you have, right, that is the same thing that happens. The supply is limited, there is more demand, people are willing to pay more for it, inflation goes up. So what actually RBI is controlling is the reason why it is called the monetary policy is what they are controlling is the money supply. Correct? When there are no interest rates there is more money available to everybody. So you can borrow more hence demand increases. It works the other way also. When interest rate decreases, it means the interest rates on your deposits also decrease. Right? Let’s say you like to keep money in the bank. The interests you are going to earn on that money also decreases when interest rate decreases. So you will be less inclined to keep money in the bank. Right? You would either spend it or you would invest it elsewhere, so investments go up as well as inflation goes up. Exact opposite happens when the interest rates are increased. Which is what has been happening. If you look at the past 24 months, the RBI has continuously been increasing interest rates. This is to bring inflation under control. When the interest rate is higher, 1. It is difficult to borrow money, right? The rate of interest on every loan is very high, so you are less inclined to borrow money. 2. The money earns very good money if you keep it in the bank. So you think rather than spending it, let me go save all of it. Right? And hence the money available, the money supply is what you are controlling. So when the interest rates increase the money supply decreases. That means the demand decreases; supply is the same, which is why inflation comes down. Fewer people actually want to buy cars. Number of cars is still the same and hence they drop the prices, to woe customers into buying the cars. That’s how the RBI controls inflation by manipulating the interest rates. Right? And hence you are reading now that the inflation is come down to 7.4 % which is the lowest in 3 years. So inflation is finally under control, the target inflation would still be around 4-5 %. It affects the economy’s growth in the long term. Right? Because fewer companies mean fewer goods will be produced. It means that GDP will be lower. That’s why in some sense growth and inflation will always have opposing effects, you will try to reduce interest rates to promote growth but that will cause your inflation to increase. First before we get into exactly what is happening with India’s exchange rate. There are three kinds of exchange rates systems that you can have. Ok. one is something called fixed. Ok a fixed exchange rate the same central bank of, this is pretty much how china operates, right? The central bank of the government fixes what the exchange rate should be, and that is the way it will stay. The other scheme is floating. So, US, Europe, all of these have completely a floating exchange rate which means that the market will determine the exchange rate. See in some sense exchange rate is exactly similar to inflation. At the end of the day what is 50 rupees/ $ is nothing but cost of a $. In rupee terms cost of a $ is 50. Correct? That means when the cost becomes 55 that is equivalent to same as inflation, right? It is equivalent to inflation, $ has inflated. I can say that rupee has devalued, or I can say that dollar has inflated. Same thing, so the nature of the effect is very similar. So, in a floating exchange rate what happens is demand for the US $, so actually US, we say that the rupee has dropped, right? It was close to 45 now it has moved to 55. Correct? So the value of the rupee has become lesser. Earlier 45 rupees could get you a $ now you need many more rupees to get 1 $. So, the value of 1 rupee has decreased. Correct? First it was 1/45 now it is 1/55. What you see is that actually across all the countries the value of the currencies have devalued. So more than each individual currency devaluing, what is happening is that the $ has strengthened. Right? The $ has strengthened and this is also simply because of demand and supply to a large extent. Right? So when the entire crisis in Euro Zone happened. One people withdrew all their investments from the Euro Zone and tried to take it to $ investments, which were considered much safer. Similarly even more than the Euro Zone all the emerging economies, right? All of your south east Asian, brazil, BRIC countries, everything is considered far more risky. So what happens is in any crisis situation the money goes from all the risky countries to the safe countries. Right? Safest country is the US. Right? Which is why the $ has strengthened. You will see the same phenomena happening even in smaller, like within a country, okay whenever people believe that lets say the stock exchange markets are very risky. Immediately all money will move towards fixed deposits towards government bonds towards safer assets the same thing has happened. So exchange rate, to understand exchange rate also its nothing but demand and supply, very similar to inflation. So the reason the $ strengthened, suddenly the demand for $ increased. Everybody wanted to go and invest in US government bond. Right? Safest asset. Right? And hence the $ strengthened. So, that is partially why the rupee devalued. But rupee devalued far more than any other currencies. So, we will see some of the reasons for that. That’s a perfectly floating exchange rate okay, where market decides entirely what the exchange rate is. Now somewhere between fixed and floating. Everything of India is in between. Right? We are neither a capitalist economy nor a socialist economy, right? We always have something which the people who wrote the constitution call the golden means, right. So our currency is a managed float. That means within a particular limit they allow it to float, and allow the market to, I as an RBI allow the float will allow the market to decide what the value should be. But only within a range. If it starts to go beyond that, if I start to get uncomfortable then I actually try to manage and bring it down. And how does it manage we will see. So it is a managed float. So when it went up to 57, RBI got really jittery, tried to bring it back down. Right? So now how do you manage the value of the currency? At the end of the day it is nothing but demand and supply, right? If the value of the rupee is decreasing what does that mean, there is too much supply of rupees. That is what it means; there is too much supply of rupees, right? Because nobody wants to invest in India, right? Simple reason when people want to invest in India they will give you $s and they will buy rupees. Because you can invest in India only in rupees. So whenever people want to invest in India they want to buy in rupees. Simple. Right? So there is demand for rupee. The moment people start getting worried about investing in India. a lot of people pulled out of investments, went to US to invest, so, the demand for rupees decreased. So how does the RBI manage the float? It manages it by, demand has decreased they can’t do much about it. They do a little bit to increase demand also. For e.g., recently they tried and increased the, for NRI deposits in bank, they increased the interest rates, right. So, that it is more attractive. NRI‘s are non resident Indians, who is basically going to get money in foreign currency, that means get money in $’s. so if he wants to invest in India he has to give India dollars and buy rupees. That is the way he will invest in India. an account in India has to be a rupee account. If I increase the interest rate for an NRI to deposit he is more inclined to deposit. So he buy’s rupees so this demand for rupee increases. So one way to increase demand. But, it is very little under their control. They can do only so much. They try and make investments attractive for foreign investors, reduce procedure etc. what they normally do is, which is easier to do is, decrease supply. Right? How do you decrease supply? The RBI goes and proactively buys $s. Right? They use up the entire rupee that they have to try and buy $s. Right? So the amount of rupee available in the system decreases. So the supply decreases. Demand is decreased, if they decrease the supply also. Then automatically the exchange rate will start coming under control. Right? So that’s the way that they try to manage float. So the moment the rupee gets devalued beyond a limit that they are comfortable with they start doing this. Right? So one reason for the rupee devaluation was the crisis in the Euro Zone. Right? It made foreign investors jittery. They took out all money from these markets, all the emerging markets. But, that’s not the sole reason; there are many countries that have far more exposure to the Euro Zone. For e.g. if I just consider a few countries in Asia. One of the reasons were worried about all the countries was exposure to Euro Zone. What I mean by exposure to Euro Zone? Is that a particular country has lent some money to countries in the Europe. Right? And now there is a risk that some of the countries are going to default, if they default then you don’t your money back. So you will be in a bad state, you will not be able to payback their dept. which is why they are worried. Now, dollar, if I look at the one year period from around august, or the last 18 months its devalued by around 27 %, was in a 1 year period, since the rating downgrade. But, even if you look at a longer period it is more than 25 %. Right? So 25 % + is what the devaluation has been, of the rupee. So, of the rupee the devaluation has been up to 25-27 % whereas India’s exposure to the Euro Zone, the amount of money that we have lent to Euro Zone, countries in the Euro Zone, has been just 7 %. This is of GDP; this is just 7 % of GDP. Now, if you look at some other countries like Malaysia, Turkey even Thailand, Indonesia, the amount of money they have lent to the, these two countries in particular, because they have lent 20 % + of their GDP to the Euro Zone. But their currencies, devaluation of their currency. Their currency is devalued only by 7 %. You understand how this 25 % number comes from? What is this? This is nothing but per $ value of rupee changed from 45 to 55, right. So when it is 55 this is 10. So 10/45. The max was 57 the lowest could have been around 42 – 43. Right? It is the amount by which the value of the rupee decreased. So, their currency is devalued only by 7 %. Though they have much higher exposure to the Euro Zone. Right? 20 % of their GDP is actually given as dept to Euro Zone, if they don’t get this money back they are going to hit 20 % of their GDP. As its only 7 % of our GDP. Right? So the risk on the currencies of these countries is much higher than it is for India. Still India’s currency devalued far more than these currencies, right? Which means it’s not just the Euro crisis which is responsible for the devaluation. There is some other reason. Right? And the biggest reason why India’s currency devalued is the issue of balance of payments. Balance of payments is nothing but $ receipts – $ expenses. All international transactions happened in dollars, right? Which is why dollar is the only foreign relevant currency. So balance of payment is in some sense very similar to when we are thinking of fiscal deficit. Right? Fiscal deficit is total income – total expenditure. This is $ income – $ expenditure. Right? That is what balance of payments is it is $ receipts, what you receive in dollars, the, what government receives in dollars, the total dollar income minus the dollar expenditure. So now our dollar expenditures are far higher than a $ receipts. Right? Which is why this is a worry? This is why there is a cause which is why the rupee devalued. The reason now the entire 1991 crisis happened. Do all of you know that there was a crisis in 1991? So, ok I will just take a minute to explain what happened. So the crisis was balance of payment crisis. Right? 1991 was a year when India really reformed, right. We started allowing free trade; we started allowing foreign investments to actually come into India. So, the reason that all of that happened actually was a lot of pressure from the WTO, rather than our own free will to reform. And the reason we were in crisis was balance of payments. We did not have enough dollar deposits to cover even 1 week of dept. So the dept that we had to service, 1 week of dept, we did not have enough dollars to cover 1 week of debt obligations. Which means we would have defaulted on a sovereign debt. So the country would have defaulted. The world bank said we are willing to aid you out of this, right; we are willing to aid you if you open up your economy. Right? Until then the Indian economy was completely closed to foreign investments. So the dictate from the WTO was that open up the economy and then we will bail you out of this. Right? Just as a lot of countries in the Europe got bailed out, we also got bailed out once in 91. So that was the balance of payment crisis that happened. It was the same problem that is happening right now. That the dollar expenditures were far higher than the dollar receipts. now this balance of payment is composed of two or three things. One is trade deficit, which is the easiest to understand. Trade deficit is just difference between imports and exports. Right? It’s just the difference between imports and exports. Imports and exports. Types of exports minus imports. When imports are greater than exports, this becomes negative, right? Which is why it’s a deficit. Because exports earn us dollars, imports we are spending dollars, right? So now, the trade deficit in India is currently 10%. Right? The trade deficit is currently 10% which is way higher than it’s been ever in the past. Then, okay one thing. Now the rupee has declined, right, because of balance of payments the entire crisis, the rupee has declined. Now the rupee declining, would it help exporters or harm exporters? See simple way to think about it is, let’s say all the costs of the exporter are, let’s say they sell a product which at $1, correct? They sell a product at $1. Today the exchange rate is 55, sometime back it was 45. So today they are earning Rs.55 for this, earlier they earned Rs.45. Nothing has changed in India, right? So the cost of production has not changed. So earlier let’s say the cost of production was 30, now also it’s 30. Right? So the profit margin has increased significantly. Correct? Now they are making Rs.25 per goods sold instead of the Rs.15 that they made in the past. Right? So devaluing of the local currency will always help exports, will always help exports. This is the reason why China has; I told you China has a fixed currency regime, right? So the Chinese currency is under-valued simply because of this reason. The Chinese, the entire Chinese economy is based on exports, right? So, the only way they can sustain is if they are competitive in the export markets. The easiest way to be competitive is to have a devalued currency, right? The moment your currency has a low value, your cost of production is lower which is why you can sell your goods at a lower price, right? Because you can sell your goods at a lower price, you become more competitive. Hence the US also had a bunch of laws against China called anti-dumping laws. Not dumpling sorry. Anti-dumping laws which is to say that you can’t dump the goods. You can’t sell the goods below cost price in a particular country. Right? So they used to adjust their currency to such an extent that it actually worked out below the cost price of the American local industry. Plus they’ll have import tariffs, all of that right? So all of your import restrictions. But, at the end of the day there is only so much that a US can do to restrict Chinese imports because China is also a major lender to the US. Right? We look at that not now, but China and US. Coming back to India. So what is happened is because the rupees is devalued actually our exports should have increased. But our exports have actually decreased by 6% this year. So 2012 up to December compared to the same period in 2011 the exports actually declined by 6%. That is because of other fundamental reasons of reduction in labor productivity and so on. We are not very competitive. But, despite so, actually the decline in the rupee should help exporters despite that the exports have reduced by 6%. So that is adding to the trade deficit.
The second is something called as a current account deficit. See, current account deficit is basically trade deficit plus other money earned by Indians through their assets abroad. That means, let’s say you have a house in the US and you are renting it out, right? You earn certain rent on it. You earn that in dollars and you are getting it back to India. Right? So that would be a part of the current account deficits, right? So it will be current account, trade deficit will be a part of current account deficit. It will be exports plus other dollar income minus imports plus other dollar expenditure. Right? So basically it will also simple way to understand is, exports is goods right? Whatever goods and services companies produce, they get earnings for it. In addition whatever income people make, maybe because they have a house that is earning rent or they have bought stocks in the US stock exchange. Those stocks are paying dividends. Right? Or they own a share in some company in some other country and they earn dividends on it, right? All other income. And then you also have capital account deficit which is the capital invested. Not important for current discussion. Complex as well. So let’s leave that for now. So if you look at the current account deficit. This is what I was talking about earlier. This we are at a 4.8% right now versus we were at a 3% in 1991 when the crisis happened. Right? And that itself was a crisis situation. A 3 point, a 3% current account deficit. Now the current account deficit is at 4.8%. Right? Significantly higher. Which is why, which was the key cause of the rupee decline which is why the rupee declined. Because the balance of payments is in such a bad state this was the single reason that, so the entire decline started when India’s rating got devalued. All of this is percentage of GDP. 3% of GDP in 91, this is 4.8% of GDP. Similarly this trade deficit that I said it was. So India’s rating downgrade happened in August 11, August 2011. That’s when the decline in the rupee started actually. So, it was moved, it was at a stable grade. It was moved one level down, so now it is at a lower, you have something called, you don’t need to get into ratings. But just as different stocks have ratings, different companies have ratings, different countries have ratings. We chose how risky is a country. The current rating of India is triple B minus, which is the lowest investment grade rating that a country can have. Below this, the moment the rating goes below this, that means the asset is not investable. That is what your rating agencies are recommending. That the country is too risky to invest. It is not advisable to invest in the country. And if our balance of payment situation does not improve or if a fiscal deficit does not stay at the target mark of 5.3 percent there is a very high risk of India facing a ratings downgrade. So if India gets a junk rating or even slightly higher than that but non-investment, not stable rating, immediately all of the foreign investments that is there is going to go out, right? Which means it will further worsen this entire balance of payment crisis. In some sense all of these are very self-fulfilling kind of prophecies. So people are not investing because the country is risky. The countries’ risk is increasing because people are not investing, right? So it’s a vicious circle that is happening. Because enough people haven’t invested in India because of external reasons our balance of payment situation is bad. Because it is bad our rating is likely to get downgraded. If the rating gets downgraded even fewer people will invest. If fewer people invest our balance of payment situation will worsen. Rating will further downgrade, right? So we are stuck in a vicious cycle. So the only way we can do it is proactively boost exports. Because at the end of the day we cannot control foreign investments coming in. The rating is bad; investors are scared of the risks it’s not going to come in. Right? So this is the only way we can actually try and boost and improve our balance of payment situation. So this has been the single largest reason for the rupee decline. Right? Because though the Euro crisis etc. is an initial cause, like I told you, none of the other countries have faced a decline to the extent that India has faced. Which is why there are factors intrinsic to India that are actually responsible for some of these.
Okay, moving slightly away from India, now when you see all of these exchange rates. Right in the beginning I was telling you that we have two kinds of GDPs, which are both fairly different from each other. There was something called a nominal GDP. I said and there is a GDP at PPP, right? Similarly you have a nominal exchange rate and a PPP exchange rate. PPP stands for purchasing power parity, which means that basically if I take supposed I want to compare the US and India. I take $1 in the US, see what I can buy, actually it’s the other way. There is a basket of commodities that is defined. I basically see how much it costs to buy this basket of commodities in the US. Then I see how much does it cost to buy this basket of commodities in India. Right? Let’s say it costs Rs.12. That means the PPP exchange rate of India is $1 is equal to Rs.12, right? That is the PPP exchange rate. So typically the PPP exchange rate is much better for India than the nominal exchange rate which is why our nominal GDP was only $1.4 by in terms of, sorry, $1.8, but in terms of PPP it was $4.4. Right? So, to illustrate one reason why there is a difference between PPP and nominal exchange rate is some countries actually fix their exchange rate, right? Like China fixes their exchange rate. The other reason is because of the perceived risk, right? So, currently India’s exchange rate rupee has devalued so much because the perceived risk of the country has increased a lot. So the economist had come up with an index which gives you the PPP exchange rate. It’s called the Big Mac index. It’s called the Big Mac Index. Basically what the index does is they had taken, so, McDonald’s used to advertise that our burger has exactly the same price everywhere, right? So they taken a price of a Big Mac in various countries and what they found is that it very closely resembles the PPP exchange rate, right? So they actually have something called a Big Mac Index which they update daily which gives you the PPP exchange rate. So according to this, okay which, so, you have, it will have percentage, there’ll be some countries which will be on the plus side, there will be some countries which will be on the minus side. These, the minus countries are basically undervalued. The plus countries are overvalued. Which do you think is the most overvalued country? Sweden is the highest. All of the Nordic countries are extremely high. So it’s mostly those are the northern European countries. So you find their currency highly overvalued. The reason is the perceived safety of these countries is extremely high, but the GDP growth has been very low. So the exchange rate doesn’t warrant that at a higher value. And which is the most undervalued country? Yeah, so China would have been the right answer until 5 or 6 months back. India is the most undervalued currency. So, because of the recent decline in the rupee, it’s been so high, India according to the Big Mac Index is 60% undervalued. 62% I think was the exact number. So around 60% undervalued. So China is above India right now. China is close to a 53%. So India is the most undervalued currency currently right? So this is just another way to look at PPP exchange rate which shows you actually the true value of a particular currency, right? In terms of the cost of living in that particular country. So that it is broadly what the RBI does to cover these two things. Basically, the factor they use is interest rate primarily to control inflation, and exchange rate they would just buy dollar. Now, to control exchange rate another thing you can do so one thing I said or to increase money supply even to control inflation. Let’s say the inflation is very low. They want to increase inflation, right? Or let’s take the current situation where the inflation is not very high but they still need to decrease this inflation. So if they need to, let’s say the inflation is decreased up to a particular point, or let’s say like a country like Japan where you need to increase inflation. So if I want to increase inflation and my supply is constant, I basically need to increase demand, right? So we looked at interest rates and everything. Another simple way to just increase the amount of money available we’re increasing demand by increasing money supply, right? All our interest rate and everything is helping us increase money supply, right? Why can’t I simply print more money? Just go and print more currency. I can just go and print more currency right? I’ll just go print a lot of notes, distribute it. Oh yeah everybody gold. Demand is increased right, everybody go and buy goods. So, what’s the problem? One thing is there are rules against printing currency, right, you can’t just go and print any amount of currency. You need to have gold reserves; you need to have something called as bullion. You need to have balance. There’s a restriction on the amount of money that you can print. Even if there was no restriction, if you suddenly start printing so much money your money will become worthless, right? All the rupee notes that got printed will suddenly have the same value as newspaper cuttings, right? Because there is excessive supply, right? Nobody wants those rupees, nobody wants to invest in your country, you’ve randomly printed so much money, you’ve excess rupees, right? So you’ve too much excess money the value will decrease. There was, there was a joke on this recently, not actually a joke. So White House in the US has recently started a website where people can actually file petitions of whatever they want, the change that they want. So somebody had a fantastic idea to actually how US can service all its debt. So they said that the US Federal Reserve should go and mint a 1 trillion dollar coin. And the guy actually researched and said that all the restrictions on currency printing are only on paper currency and on silver and gold coins so if we can have a platinum 1 trillion dollar coin that is a solution to all of US problem right? I have this platinum, this was actually filed on the White House website and it was all over the news. So that was their platinum 1 trillion dollar solution. All of those are not practical, right? Practically printing excessive money to generate money supply cannot be done simply because the currency will get devalued. The currency will have absolutely no value. In fact to a large extent, that is what had happened. Excess money supply is what had happened in the Southeast Asian countries during their crisis. Which is why the money became worthless. Most of these countries, if you go, like a taxi in Indonesia would cost you 5 million rupiah. Because the currency is that undervalued, right? So, that, that’s what excess money supply by just printing money would cost.
Right, so these are broadly, the economic terms that you would encounter while you read newspapers as well as which help you explain more of the things happening both in India and globally, right? In an economic context. Right? So the idea of today’s session was to get you actually comfortable with some of these terms. We’ll have subsequent sessions where we’ll actually talk about current events. We’ll pick up events that are important and actually discuss them in detail. See how each of these factors may or may not have had an impact on those. Right?
Before we end I just want to spend a few minutes on you know how you should go about your preparation both in terms of writing all the sops and the forms that you have as well as preparing for the interview. Right? Lot of you have had lot of questions so I thought spend some time. Right? So see the first and foremost thing for any interview or anything to do is be confident. Even if you don’t know the answer in a PI, I’ll come to what you all should know in a bit, but be really confident about everything you say, right? That wins half the game. At the end of the day all of the interviews would be extremely relaxed. One more thing you should look out for is, like I got very bad advice when I was preparing for my interviews, right? So I had all the calls and everybody kept telling me that it’s all going to be stress interviews and you know they are just out there to put you down and so I thought there are these people whom you know virtual swords are going to come and be sitting in my interview room. Trust me that’s not the way any of my interviews happened, right? That’s not the way any of the interviews happen. The idea of the interview is for them to get a very good idea of who you are. Whether you fit in well, whether you know your stuff, right? So putting you under unnecessary stress does not help them. Right? So once stop worrying about that it’s going to be a super stress interview, I don’t know what’s going to happen to me. It’s not going to be like that, right? So just be calm and, calm and confident, it’s a very relaxed interview, right? It’s fairly easy to crack. The second thing, the key to cracking an interview is basically try and steer the interview in whichever direction you want. And by that I mean like in most interviews you’ll get a very open-ended question. Most interviews start with a question “Tell me something about yourself.” Right? And most people, I have interviewed, mock interview as well as real interview, many people over the past 3 or 4 years. Everybody wastes the question entirely. When I ask you this question you’ll say okay my name is xyz, I work in ABC, I studied here. End of your answer. You’re again looking at me. I don’t need to know all of that, right? That’s written on the form that I have. You’re not using the question at all. Tell me about yourself is the best possible question that you can ever get. It’s very open-ended right? Just talk about whatever you like. For example in my IM Calcutta interview I started it saying “Okay, I like playing a lot. I am into sports.” I like and it was a short interview. It was a 15 – 17 minute interview. We just discussed table tennis. And the interviewer spoke for about 10 minutes and I spoke for 5 minutes, right? I converted the call so went off well right? So that was the chilliest interview I had, but, similarly one of my batch mates from IMA had an IMA interview of 35 minutes on cricket. All they discussed was which teams are the best, what players are best etc. Right? Because see you would typically in every interview you have 3 interviewers, chances are amongst the many things that you like, one of the guys’ sitting on the opposite side will share an interest, right? So proactively at least try to steer the conversation towards a topic that you want to talk about right? So if you like cricket, when I say tell me about yourself, you start with saying I am really passionate about cricket. There is no harm to it. But then you better be passionate and know about cricket, right? Otherwise it doesn’t help. And they can be really a lot so like one of my friends was asked to do a
Bharatnatiyam dance in an interview. So it was just some 20-30 seconds but she said that I have done a lot of this and dance so they said why don’t you show us a sample. So that brings me to my second point that don’t lie. I heard from a lot of people, okay I don’t have extracurricular to write, I don’t have hobbies to write. So please don’t invent and write cool things okay. Think about stuff that you genuinely like things that really interest you because if it really interests you only then it will know, only then you will know about it. See these guys have 30-35 years’ experience in interviewing. If you lie, they can catch a lie immediately, right? That’ll do you more harm than good. So rather than lying about a hobby it’s better to say I don’t have a hobby. Don’t know. I don’t have a hobby is the worst thing to say. Please don’t say I don’t have a hobby. In the next like 15 days cultivate a hobby if you don’t have one. Right? At least read up and look at hobbies which doesn’t require you to actually know something, right? So like you can like watching tennis. So you know you’re really desperate okay I don’t really do anything, I don’t like anything. So cultivate hobbies, there might be something that you’re interested in. It doesn’t matter what it is. See nobody judges you based on the quality of your interest, right? You may say I love playing video games. Now I might hate video games but if you know enough about video games and play them well I respect you to have that as a hobby. Right? So anything is fine. But ensure that when you’re saying something is your hobby or your interest, you actually know things about it right? You’ll get asked questions about it. In fact everything that you write on your sop, or your question/answers, whatever, starting from when you were in school if you described an incident about that you better remember everything about it. You better know everything about it. Right? So simple things like what cities are you from. So I spent like about 6 months or so of my life in Nasik and it was writing on my form somewhere and I got asked all of Ramayana that happened over there. Right? So unfortunately the interviewer happened to be from Nasik and knew a lot and was interested in mythology, right? So I got stuck. So everything that you’ve written, even small things like this which you feel might have no bearing, better ensure that you really read up and you know everything. You should know everything about what you’ve written on the form. But most importantly try to steer the interview in the direction that you want. So when you’re preparing for the interview, the best way to prepare, other than your factual stuff, right, about the personal questions the best way to prepare for an interview. Now this is going to sound a little crude, but think of it as selling yourself. Let me just clarify before you make judgment. See, at the end of the day think of it like if I was selling a product what would I do? I would try and explain the best features of the product to the customer. Think of the interview that way. So basically think of, at the end of the day, you’ll get selected if the interviewer likes you, right? As simple as that. Pretty much, right? He likes you means he is impressed with you. He is impressed with the things that you’ve done. So think of what are the 3 or 4 things about me that are really superb. If the interviewer knows about this he’ll definitely select me. Right? So you yourself are the best person to judge that. Think what are these 3 or 4 things that I want to highlight about myself, that if the interviewer knows about this, he is sure to like me. And ensure that in whatever way possible, you bring up those 3 or 4 things in your interview. Right? If you get a question, tell me about yourself, then that’s the easiest question. You just directly start talking about those things, right? But even otherwise if you are asked what is your strength, what is your weakness, what do you want to do in life. All of these are very open-ended questions. And you’ll get enough of such questions, right? So in your mind mentally have a checklist of these things, right? And keep ticking them across that have I covered these points. These are 3 things that are really excellent about me; these are three things that make me standout from the rest of the people that have gotten a call, right? And I want to ensure that my interviewer knows these 3 things. That is pretty much the only thing you need to do in an interview. Right? Everything else just factually you need to have knowledge, you need to know stuff. But this is the most important thing. This will help you steer the interview. It will help you take the interview in the direction that you want. Right? Otherwise you pretty much have, no, if you treat it as the interviewer is going to ask me questions and I am going to answer then you have no control over the interview. You’ve to answer every question that he asks. Instead if you frame your answers in such a way. See, at the end of the day the interviewer does not sit with a questionnaire. He is not asking you 1, 2, 3, 4 in line, right? It’s more like a conversation which is why you get a lot of scope to steer the conversation the way you want, right? So throw in points in your answer that will force him to ask a follow up question on it, right? And then you can have pretty much your entire interview on the topic that you like, right? So that is the most important thing you should try to do in your interview. Steer it in the direction that you want. Second thing is, know your form really well, know everything top to bottom that you’ve written on it. This sounds silly but people still don’t learn that’s why I am explicitly saying, “Please don’t lie!! You’ll get caught.” Right? So write truthfully.
The other thing, the final thing you need to do for all of your answers, is, just prepare. Even for, there are, the form that you get itself gives you a lot of leads to the kind of questions right? Many questions will be similar. What are your strengths, what are your weaknesses? Give me an example where you demonstrated this, demonstrated that. Why do you want to do this? Right? Why engineering and suddenly MBA. Why do you want to change track? Why did you do badly in your engineering exams, right? Things like that. A lot of things like that so all of these questions that you can accept, expect prepare for the question. What I mean by prepare is just think I don’t mean like write an essay of the answer and then practice saying it, okay? Then it will sound phony. Definitely don’t do that. At the end of the day it has to be a spontaneous answer but at the same time if you’re prepared it helps you be a lot crisper. If you’re thinking and talking at the same time you end up being very verbose. You’ll take 5 sentences to say something you could have said nicely in 2 sentences, right? So which is why preparation helps. You’ll say to the point, you’ll convey the point that you want and you will be crisp and smart in the way you talk. Right? And hence preparing is important. So make a list of these questions you’re likely to be asked and just by prepare I mean just put 2 or 3 words, 2 or 3 simple points that will illustrate the answer. That’s it. Only complete the thinking part. You don’t have to practice the sentence formation and talking. Guessing you all already know that, right? So only thing you need to do is the content. What am I going to say if I am asked this question, right? So preparation to that extent.
And finally, in the entire interview, see, be confident and be positive largely okay? So when you are asked, a lot of you might be working, right? So maybe you hate your boss and maybe one reason you gave the CAT was because you just wanted to get out of that job. But, so while I said don’t lie; don’t say it in these words in the interview, right? Don’t say I really. So basically always be positive. You can say the same thing and word it positively, right? Rather than saying I really hate my boss, I thought he was stupid and I was smarter than him, you can say that I thought giving, doing an MBA will give me an opportunity to do a job that better fits you know my skill or my experience or whatever. Write something like that. The point is don’t be negative. Because that is a reflection – the guy who is interviewing you doesn’t know your boss at the end of the day. So he is making an impression only about you, not about your boss. So if you talk negatively you come across as a person who bitches about everybody, who talks negatively, who is generally unhappy, frustrated, and that’s not really the kind of people that we tend to like, right? So just be positive throughout. Answer every question. It’s okay to express your dislike with what you were doing but be positive. Don’t talk in extremely negative language, right? Overall keep the tone of the entire discussion positive. You’ll have mock interviews as well as certain practice, essays and more sessions on different topics.