STAGFLATION IS MUCHMORE DANGEROUS THAN INFLATION

Till the end of 2008 India had problem of rising prices. The inflation created havoc. It went out of control and both RBI and through monetary policy and Government of India through fiscal measures were busy controlling the inflation. The rising the price of crude oil brought in inflation and it was not possible for a while to control the inflationary pressure. But fortunately from the beginning of the New Year the effect of measures taken by RBI could be seen and slowly the prices started falling. All heaved a shy or relief when the first sign of falling inflation was noticed. But alas! The inflation fell rather rapidly.

The rate of inflation on 7th June 2008 was 11.66% say almost 12%. The end of January saw inflation coming down to 3.2%. At this point of time people in general and Economists in particulars were very happy. Even the Government felt relieved. But come last week of February the smile turned into a grin. The inflation came down to 2.43%. This was one of the lowest levels of inflation. Economist was not sure whether it is a good sign or signal of incoming turmoil. People were confused to see that prices of consumer goods have taken an upward trend. What is this? Price of potatoes and onions came up by 20% in the month of March yet the official figure of inflation has gone down. In fact inflation went down by 7th of March to0 .44%. Never in the history of modern India inflation have gone down to this extent. This time some of the economist started feeling whether the country is passing through a state of Deflation?

Montek Singh Alluhwalia stoutly defended that lower inflation does not necessarily mean a state of deflation. He felt that economy might register lower inflation some time but out of such trend of inflation would rejuvenate the economy by creating fresh demand. Though, on a few earlier occasions, we had not agreed with the views expressed by him on the rate of growth of economy yet this time we tend agree with his utterance. Yes, lower inflation does not necessarily meant a state of deflation. What is the e meaning of Deflation? In common usage, deflation is generally considered to be "falling prices" while Inflation is "rising prices". Actually this is "price inflation" as opposed to "monetary inflation".

However, every month some prices are rising while others are falling. So the inflation rate is a compilation of all of these factors. Currently, we have some major inflationary forces combined with some deflationary forces.
On the inflationary side we have rampant money creation, and rupee devaluation compared to other currencies. This is causing prices for food and energy to skyrocket.
On the deflationary side we have the sub-prime fiasco which is reducing liquidity for banks and causing housing prices to fall.
So there you have it, rising food and energy prices and falling housing prices... inflation and deflation at the same time. Many economist feel sooner of later the rate of inflation may come down to Zero. But do not panic. Zero inflation does not mean disaster. The countries like Austria, Switzerland have zero inflation but these are the country where price are greatly stable. One thing must be kept in mind though rate of inflation have reached 0.44% yet the real rate of inflation compared to last year is still higher, which does not get reflected in the maze of statistics. According to us the price will stabiles sooner or later. However Inflation affects the middle class harder because the prices of things they buy go up while their income stays the same. Generally, the Government walks a tightrope though; it cannot inflate all its debt away quickly, without destroying the economy, so it faces a constant balancing act.
I am not afraid of deflation as such. It would balance out soon. What I am afraid of is stagflation. The simple definition of Stagflation is a "stagnant economy coupled with price inflation". This would be dangerous for our economy.

HOW TO TACKLE LAY OFF NOW ?

The Industries have started laying off employees now! Even CITU backed employees have accepted pay cuts in Hindustan Motors Limited, to avoid lay off. Today’s youths must realize that Lay off is not a personal failure. It is a requirement of the modern business system. Yes, lay off brings in personal pain but like all difficult situation this could be tackled with determination. Gone were the days when once a person was recruited he is retained for the life. Ten years back it was impossible to enforce lay off. Now, public undertakings are contemplating job cuts. The acquiring of fresh skills of the day is the only security.

Some readers enquired how to ensure security of jobs? Most of the engineering and arts graduates are facing dichotomy. Whether to join MBA course or accept a job with paltry salary for the time being. I wrote back to them that honest boys do not get pressurized rather they pressurize their mind to stabilize the emotion. The hard time don’t last long but hard mind do withstand calamities always. We need to realize that it was single minded devotion to develop fresh skill that would be only savior The present situation of uncertainty has brought in sufferings. Unfortunately our society has developed a culture where the designation and amount of money a person makes has become the signature of importance. Job has become essentially a self definition, not the value he upholds.

The young boys need to realize following points now::

• The companies are running a business, not a charity. Don't take it as a personal failure.
• Security does not come from the Job you are doing or the company you are working with. Security comes from the knowledge and skills you have developed. Keep upgrading your skills so that you are always employable, even in the worst time.
• Keep your eyes and ears open.
• Avoid knee-jerk reactions. If your company lays-off people, don't panic.
• Once you are laid-off, keep your expected salaries for potential recruiters at a reasonable level, to avoid the chance of interview.

Many people do not realize that all educated persons may not be “employment ready” and “ready to deploy” for the jobs. What are the meanings of” employment ready” and “Ready to deploy”? The “employment ready” persons are those who have basic skills in place and can be hired by the industry. The basic skills are problem-solving communication, interpersonal skills and working knowledge of the technical domain such as computer operation and programming for IT aspirants. The” ready to deploy” persons can start generating revenue for the company immediately. It is very difficult to sometime to get employment ready people as well as ready to deploy people. In good times, these investments were done by companies after hiring fresh candidates. However, in these tough times, companies are actively seeking resources that are pre-skilled. Hence, students need to make the investment in enhancing their skills themselves to meet the industry’s expectation. I believe that the key to the solutions is to make the academia work closely with institutions that can help them improve the skill set of students. Now Government can step in and provide much needed help in this regards by identifying institution to train jobless boys. Trauma of loosing job is painful indeed. Wives feels miserable to tell friends that husband is not going to job for sometime. Of course even now there are job which are recession free. They are Accounting, entertainment, energy, education, beside Government, health care, law enforcement, media, old age help, and priesthood, plumbers, electricians and service boys. If dignity of labour is believed let us try our hands here to survive.
We are again and again harping that lay off is not a personal failure. Employees must keep cool and parents need to develop a support system instead of bullying them, showing the example of others. All boys are unique in their own ways. We need to remember; Einstein failed to count his changes initially but resolved the mathematical puzzles of the universe, later. Let us cheers up the young people for getting them trained up.


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REGULARITY AND DISCIPLINE INVESTMENT HABIT CREATE WEALTH

Though the Indian finance Minister declared recently that the economy would recover from October this year, we are not so sure. My advice to our readers would be to expect initial recovery from July 2010 and not before. The real recovery may be expected after2011 only. However measures announced by Government would improve the sentiments of business circle. It is time to talk about investment in Mutual Fund. What is the meaning of Mutual fund? The Fund Houses through asset management company provide opportunity to general public to pool together their money to keep in trust mutually with them and later invest in share market through specialists known as the fund manager .The system allows smaller investors, to invest in shares of larger companies also, allowing to reap benefit as the share market goes up slowly and surely in the longer term. Some time loss is also incurred when market crashes. If you are impatient, and are in a hurry you would surely burn your finger. The world is passing through great recession. It is the time to hold your resources tightly under control.

Many people think buying share in the market is child’s play. It is not. It is always prudent to invest first in Mutual fund and have an overview of the functioning of the share market. The most investors are neither specialist nor have inclination to do research before investment. Yet all the investor desire to make money for their sustenance and for rainy days in future. The younger generation can take risk by nature and as such they are the person who should take plunge into Mutual fund arena from early in life. I do not recommend mutual fund after reaching 75th years of age, unless they have capacity to withstand risk. Some senior citizen invest in balanced funds. In balanced fund investment pattern is 60% investment is done in equity where as 40 % money are invested in debt instrument. The best balanced funds at this moment are DSPML Balanced fund, Canara Rebeco Balance, HDFC prudence, F T India balanced and Tata Balanced. (Source Mutualfundsindia.com). The best would mean the best risk adjusted return and not the present highest return of a fund. I feel senior citizen should avoid investing more money in Mutual fund or shares. You need to invest in discipline manner and with regular interval. None would go wrong in long term if funds are chosen carefully.

While I was discussing the importance of Mutual funds with some of my professional friends Mr Basu , a former Director of McLeod Russell remarked today the greatest worries of the women of India is how retrieve the money lost by their husband in share market. Hearing his remark all of us laughed. But his statement was greatly true. . In reality, Ladies have uncanny sixth sense so far as money matter is concerned. Mostly their apprehensions come true. So, before any investment is made, even after taking professional assistance, discuss with your wife and get a nod before investment is made. If you are single ask your mother or sister. You would probably get a precise answer. One of our readers asked what is the cheaper way of buying mutual funds ? My answer was if units of mutual fund could be purchased directly from the Fund house it is surely cheaper. But in all the towns’ offices of mutual funds are not located. Some of the agent provides service so well that investor prefers to go through a reputed agent. Some agents help building portfolio statements also. It would depend on your convenience whether to use agent or deal directly with the fund House. Buying directly would reduce cost of acquiring. Another readers asked which are the funds should he invest in for fifteen years to take care of his daughters higher education. I felt happy and suggested that he should visit www.valueresearch.com and find the best risk adjusted five star and four star funds and invest systematically. The regularity and discipline investment builds up real assets. However consult a Financial Advisor before investment. But Senior citizen can rely on Fixed deposit of Bank , Government Funds like SCSS and PPF.



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HOW TO STOP FRUSTRATION OF JOB LOOSERS

Everyday we are receiving bad news on increased unemployment in our country. The official version is that India is not passing through deep recession. Yet during last six months educated job loss was reported to be five lakhs. No new employment has been created in last six months too in most large private sector enterprises. This is absolutely very scary situation. Many fresh graduates who had campus interview in 2007 have not yet been absorbed. They are perhaps going to be called to join in now. The boys who were interviewed in July 2008 still don’t know when they would be given the posting. The student of 2009 batch are feeling frustrated completely. What would be their fate?

The uncertain future awaits fresh graduates in IT, sectors mainly. The automobile sector has also stopped taking fresh graduates. The Steel industry, The cement sector have not also recruited any more. I checked up with a HR executive of Microsoft, based in Bangalore, whether they have been taking person in SAP segments. (Generally SAP segments are still vibrant world over). He replied to me that there is a frieze on most new appointments. Under such circumstances who can empower the young job seekers?

The frustration of Job seekers have gone so high that some of the boys have raised their voice in protest against recruitment of cricketers by industrialists and by film stars turned businessmen with very high salary involving foreign exchanges. In Japan, young job seekers are organizing protest rally by throwing fist in open air against vulgar display of over spending by businessmen and by celebrities. These are of course sign of frustration. The time has come for society to note these signals before it is too late. The question before us is how to stop frustrations of young job seekers?

Some of our friends discussed the matter and evolved a consensus that may be worth mentioning. I did receive a suggestion from a friend of mine. It is a fantastic suggestion. All the companies who had taken campus recruitment program and had already issued appointment letters should sponsor the candidates to a post graduate course as they have not been able to provide them the jobs so far.. The companies can negotiate with a few technological universities in each region to impart one year's technological and business oriented course and train those appointees. This could be equivalent to one years post graduate course in line with the Sloan school of Management's model.

The course content can be similar to the MIT's program and can be called Master of Techno-management. This could be achieved through payments of half the salary which the corporate promised to students in campus interview. This program would save the money for the company, but prepare the appointees to accept greater social challenge in future. The boys would have fulfillment of acquiring knowledge instead of frustration and of course a degree, at somebody else expenses.

Some of the Indian employers have developed maturity in handling potentially-messy situations in a country where layoffs are still frowned upon. They were making sure the retrenchment process can be as painless as possible. The idea is to hand-hold these employees while helping them to get jobs, so that they can walk out of the door with their head still held high.
Software giant Cisco was the first to show the way in 2001, after the tech bubble burst. The company allowed employees to take sabbaticals while they were paid one-third their salary. During that time, they received employee benefits, and access to training and continuing education. If jobs opened up, these employees enjoyed preference. Thus Cisco saved money, talent and - more importantly - its reputation as an employer of choice. So, Cisco is now world’s most preferred company to work with.
Our society has also a role to play. During the time of such economic depression rich people needs to stop showing off high spending, throwing lavish parties and vulgar display of wealth. The Government needs to take up construction projects, Road buildings and sponsor specialized training courses for a year in local MBA institutes for qualified personal that got job but could not join. It would be small money compared to reputation they might earn by sponsoring educated unemployment.
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THE INTERIM BUDGET BELIED MASS EXPECTATION

The interim Budget presented in the Indian Parliament was a lack luster budget in recent times. It did nothing to assure anyone any way as to how financial crisis facing the country’s economy would be met. It was merely an excise where statement of account was placed and expenditures were accounted for. Even from where revenues deficit would be met were not explained in details. It also did not specify how new urban jobs would be created to push back unemployment (though allocated 1,31,000 crore for rural sector) situation of the country. The interim budget was a copy book exercise that needs to be followed in normal circumstances. But, is this a normal time? The country is faced with turmoil when business growth is slow and unemployment is mounting and the non-creation of jobs have been creating havoc..

Pranab Mukherjee's speech was almost so uninteresting that half of the Treasury benches were found napping. A few MPs were almost heard snoring while budget speech was read out. There was neither high applause nor booing by the opposition bench which is usual during the budget speech.

This was perhaps first budget in the years where there was almost no change in tax proposals. The Government neither gave any tax concession nor imposed any tax. Naturally corporate sector was not happy as it was expecting withdrawal of tax surcharge. It also expected some concession to Realty and automobile sector. The government felt convinced that nothing needs to be done presently. But it was Pranab Mukherjee who indicated that there could be a third stimulus package for revival of economy further.

The gross tax revenue of the government during 2008-09 is likely to fall short by about Rs 60,000 crore (Rs 600 billion) over the budgeted estimates, as per the Interim Budget for FY'10 presented by acting finance minister Pranab Mukherjee on Monday. It is sad that fiscal deficit is growing in alarming pace and further rise in deficit would be dangerous to the health of the economy.(Rs3,32835 crores deficit in 2009-10)
The shortfall, according to Mukherjee, was 'on account of the government's proactive fiscal measures initiated to counter the impact of global slowdown on the Indian economy.' But there was no indication how this gap would be met. Despite a fair degree of hyped up expectations that had built up in the media, the actual budget was a non-event.
Needless to say, the budget contains nothing that would directly put more (or less) money in anyone's pockets because it was not a budget at all. Any expectations from this event were misplaced. It is a fact that for almost the first time in living memory, many of us will be paying less tax not because tax rates have been lowered but because our real incomes would be lower. (Inflation is expected to shoot up)
Could the government have done more in this interim budget? Normal practice says that it should not have. However, these are obviously not normal times. Dhirendra Kumar, eminent Financial and Investment expert questioned rightly that why couldn't politicians of the major parties have sat down together and produced a sort of a consensus rescue package that could have gone beyond the constitutional proprieties that bind a vote on account? The answer is that because they are all in election mode. The Share market reacted sharply and went down by more than 300 points of sensex.
Mr. Mukherjee's speech in parliament was little more than the second speech of the election campaign, the first one being the railway budget speech. All of them-government and opposition alike-have gone into full election mode and clearly don't care if the country's economy marks time till about June or so. . In the middle of the worst economic crisis in living memory, our leaders have found more important things to do. How they are going to create more employment was not disclosed. Neither had they tried to empower the youth who are facing bitter joblessness in recent time.
Based on the things Mr. Mukherjee said today, it is difficult to forecast how the real budget will affect the savings and tax situation of the average Indian. He did say at one point that 'In the days of financial stress, tax rates must fall and our ability to pay taxes must rise.' We could not understand what this means . How must our ability to pay taxes rise in days of financial distress? Perhaps it's just an off the cup remark of an astute politician whose heart is not in his job anymore.
The interim budget did nothing, which was expected. Perhaps the political environment is too busy in their own planning and have no time to empower common people to face the crisis the country was facing due to financial downturn



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PEOPLE NEED TO CONSERVE RESOURCES ON HAND

The 2009 is going to be a difficult year, despite optimism from Government of India. All indication points out to a tough time. Of course, it is true that tough time does not last forever but tough people do survive always. This is the time for survival. Almost all the developed countries are reeling under crisis. America is going through a most challenging time. The President Obama has convinced his congress for approval of stimulus package yet the very foundation of capitalism is under pressure. We would not be surprised if within ten years the condition of capitalism takes the route of Russian Socialism. Unemployment situation of America is mounting up. The growth of GDP has turned negative. Lots of educated persons have become jobless. The president is publicly criticizing corporate Houses for payments of fat Bonus to senior employees when large numbers of people are in distress. The condition of Europe is even worse. The expert opinion predicted that some European nations may experience the condition of poverty after long years. With such a condition of developed countries, export from India is going to be badly affected. Unemployment and job loss would be inevitable in our country. What is to be done now?

In India, of course, the conditions are not so depressing. Yet the global economic turmoil will affect Indian citizens too. There would be no bank failures, a few industries might close down. Unemployment will rise; export sector would no longer be a money spinner. Indian industry shall have to depend on the internal market. Since domestic market is large it would support those Industries which produce commodities of mass consumption. Investment would provide low return for another few years. The economic growth would fall below 7%. At this moment most pressing need for middle class would be to conserve money. How to do that?


It would be foolish to take out invested money for that would mean definite loss of wealth. A day would come when market would jump on its feet and people who have patience would reap the benefit. This is the time to conserve money by minimizing avoidable expenses. This is the time for middle class to be prepared for difficult time for another three years by becoming frugal in their habits. Don’t buy expensive Cars, unless it is most essential, don’t take luxurious trip for sightseeing. Check the habit of eating out and throwing lavish wedding parties to show off. Do everything with moderation. You would need money to keep your body , soul and emotion together. Do we have to stop investing?

Yes, for the time being keep away from bulk investing in equity. Those who have continuous flow of money like that of Doctors, advocate, creative people and self employed need to conserve money in FD of good bank and also in Arbitrage fund. For taking IT (80 C) benefits invest in PPF, Bank Fixed deposit and senior citizen scheme. An investment in good ELSS fund could be made through SIP only by younger investors. No lump sum investment should be invested in equity. If you must invest then do it through SIP. Buy Nifty & Gold ETF. You would need money for food, children’s education, health; payments of property tax or rent and to buy cloth etc. (avoid buying unnecessary expensive garments and shoes). During the period of depressing economic condition the best vocation remain connected with Health & food industry. Most of the time food & health product defy down turn. Perhaps all of us remember that Lee Iacocca’s father advised his son to join butchers trade when he lost his job as that was depression neutral area.
The effect of depression would penetrate our country suddenly. This is the time to forewarn middle class to conserve resources. Some time they behave like an Ostrich. In fact Indian middle class are exceptionally brilliant but most of the time they remain engrossed in day dreaming. Once they are awake they generate tremendous ability to protect themselves from any onslaught. Many people asked when the situation would improve ? It is difficult to predict. However, according to a proverb tough time doesn’t last forever, but tough people do. Let us hope 2012 would be the year of bright sunshine.

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THE BEST TAX SAVING DEVICES ARE ELSS AND PPF

EVERYONE WANTS TO SAVE ON TAX BEFORE YEAR ENDS. WHY NOT? TAX CONSTITUTE 30% OF THE TOTAL INCOME AND IT BECOME HIGHER WITH SURCHARGE ETC. THE NON PAYMENTS OF TAX IS BAD IN LAW. BUT SAVING OF TAX WITH LEGAL MEASURES ARE COMPLETELY IN ORDER. EVERY PERSON EARNING INCOME SHOULD KNOW WHAT ARE THE LEGAL WAYS TO SAVE TAX FROM THEIR INCOME. FEBRUARY IS THE HOT MONTH FOR SAVING TAXES FOR AT THE END OF EVERY MARCH THE FINANCIAL YEAR WOULD COME TO A CLOSE. THIS MONTHS IS THE LAST MONTH TO DECIDE ON THE TAX SAVING SO THAT BY MARCH ALL MEASURES CAN BE TAKEN AND TOTAL DUE TAX PAYMENTS ARE MADE.

This is the time for Tax Saving device. The most employees look for the best tax saving devices during the month of February. In corporate houses employees need to submit their tax savings options to the account department who in turn calculate the tax liabilities of staff, workers and executives for proper deduction tax from their income. As February approached I started receiving calls from the readers of our column as to what would be the best tax saving devices during this fiscal. It is a genuine query and needs to be addressed dispassionately.

The total limit of tax exemption under section 80 c is Rs. one Lakh only per annum. All the employees would get the benefit of provident fund deduction from its employers. After receiving the benefit from Provident fund the gap shall have to be filled up by subscribing to other tax saving devices. The tax saving devices include, among others, PPF, Life insurance, ELSS, NSC certificate, ULIP, Senior citizen’s fund, bank fixed deposit and post office FD.

My personal preferences are Insurance and PPF. But here is a catch. Both Insurances and PPF do not really suit senior citizens. I have advised some of my senior citizen friends to subscribe to Bank’s fixed deposit or in SCSS for five years to avail the benefit of 80 C benefits. Some of my friends are holding PPF even after expiry of mandatory 15 years period. These friends were advised to put their money, for 80 c benefit, in PPF account only. However only RS. 70,000 can be kept in PPF. Then where to keep the balance amount of Rs 30,000 to enable them to avail full tax benefit? For senior citizen best bet is to keep the money in bank’s FD or SCSS for five years, in case he has no PPF account.
NSC is good but investors have to pay tax on interest unlike PF, PPF and ULIP. So it emerged that the persons who have existing PPF account they can put the money there. It would help them greatly for there would be no tax on interest and in case they need money in emergency they can take it out too, after completing seventh year.

I asked a few young friends as to why they did not like to put money in ELSS? They replied the stock market has crashed and they felt that was not the time to buy ELSS. I explained to them that the best time to buy ELSS was now, because the market has crashed and the NAV (at which price they would be able to buy) is the lowest. A few economists friend of mine calculated the compounded annual growth returns (CAGR) of both ELSS and Fixed Income instrument. It was found that in a period of five years compared to fixed income instrument ELSS have given better returns in spite of the great financial downturn. One of my intimate friends subscribed to ELSS in 2003. He confirmed that he is still in profit despite the fact that Share market came down to 8900(Sensex) from 21000. Yes, his investment in 2003 is still in profit... The share market never remains dormant for a very long term. The world had seen worst financial disaster in 1932 yet it had survived the depression. The financial mayhem has brought in recession surely but it is nothing compared to experiences of the great depression. American people did not even have enough to eat then. The situation is bad even now but is expected to improve by 2012.

It would be worth mentioning that the return of last five years in ELSS is much better than fixed income instrument. Magnum Tax gain’s return is 27.25% and Sundaram Tax gain’s return is 22.59%. HDFC Tax saver gave 20.56% return. Whereas the highest return in fixed income instrument like Bank FD & Senior citizen scheme gave 9.31%& PPF and NSC gave around 8.16%. Younger employees do not need to be afraid of. To me ELSS is the best Tax saving instrument for younger investors. For senior citizen, Bank FD, SCSS would be better if no valid PPF account is available.

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