The Connectere brings forward the mind’s eye and panoramic view of the young writing enthusiasts on various topics

Month: April 2021 Page 1 of 3

Khadi

HISTORY OF INDIAN TEXTILE: KHADI

When one hears the word ‘khadi’, the first thing that springs up to mind is Mahatma Gandhi and the Swadeshi movement that he led. The fabric is a symbol of Indian textile heritage that embodies a worldview of the past as well as of the future. Khadi has been linked for a long time with India’s freedom struggle and politics. Although a hand-woven fabric, it has a legendary meaning and relationship to India’s freedom struggle. It has a long winding history and the evidence of its presence came from Mohenjodaro and the Indus Valley Civilization. However, Khadi came in limelight as a pure hand-woven native fabric during the Swadeshi movement led by Mahatma Gandhi.

Corporate zombies

CORPORATE ZOMBIES IN INDIA AND ABROAD

The past two decades have witnessed the better play of credit expansion and contraction, decorating the balance sheets of Indian banks with delinquent amount of loans. Worthy to note, some banks have taken the high road of credit extension continuation and it wouldn’t be surprising to see borrowers “alive” on paper despite the waning economic productivity. Such firms who skip selling or writing off these credits acclaim the term “zombies” – practically so because they restrict and tie productive capital and workforce while preying upon newer and healthy investments.

REGULATIONS IN LABOUR MARKET

REGULATIONS IN LABOUR MARKET: GOOD OR BAD?

Regulations in the labour market are so widely talked about; there is an array of perspectives and theories about how flexible a labour market should be, in order to make industries work in harmony with the growth process. High rate of growth that India experienced pre-2008 global crisis was not accompanied by the same rate of growth in employment. One reason stated was the stagnation of growth in the manufacturing sector coupled with inflexible labour markets.

Investment banks vs Consultancies

Investment Banks vs Consultancies

Without an iota of doubt, two of the most lucrative careers in the world are investment banking and management consulting. Both of these professions are highly well-paid and professionals in both industries are amongst the top in the echelons. Both these industries demand specific skill sets from prospective candidates. Fresh graduates at the beginning of placement seasons often find themselves at crossroads: where to make a successful career? I-banking and management consulting are often in the bucket lists of college graduates. This brings us to a question? What makes investment banks different from consultancies? Why are these careers one of the most sought ones?

weekly analysis

The Weekly Analysis – Edition 54

There are two aspects to the news- knowing the headline and understanding the intricacies of it. We at The Connectere focus on both. While The First Forum edition gives a brief about the headlines, The Weekly Analysis Edition is meant to educate the reader on what do various news mean and what are their intricacies. This initiative is meant to educate the reader on how to understand the important news. In the Fifty Fourth Edition we are covering the following news:

  1. Localised restriction detrimental to economic activity
  2. Why saving the middle class is critical for India
  3. How is Ingenuity, the first helicopter on Mars historic?
  4. The Oxygen Conundrum

Future

Localised restriction detrimental to economic activity

The second wave of the pandemic is forcing states to impose stricter curbs in place of full-blown lockdowns, but the restrictions are disrupting economic activity. Maharashtra issued an order restricting the timings of essential shops dealing with grocery, vegetable, dairies and other items to four hours. Telangana imposed a night curfew, while UP said it will start weekend shutdowns from 23.04.21. Similarly, several other states also imposed partial lockdowns or curfews.
While states are still trying to avoid large-scale and stringent lockdowns, rising restrictions on mobility and economic activity may deliver a second financial shock to an economy that is just emerging from the deepest recession in at least four decades. These restrictions could deepen the economic impact of the second wave in the coming weeks. As of 18 April, NIBRI has further plummeted by over 16% points below pre-pandemic normal from 12% points in the previous week.
The stock markets continued to slide on Tuesday over covid-19 concerns, with the benchmark Sensex shedding 0.51% after erasing gains seen earlier in the day. Consumer confidence will be impacted, and discretionary spending will come down substantially, but it may be compensated in the form of pent-up demand later but there may be more impact on the services sector as discretionary spending may not resume immediately after the situation normalizes. The restrictions particularly threaten the retail industry. With localized restrictions across states, the retail industry is beginning to see issues faced by retailers last year repeating in some form. Considering the impact of last year on business, closure of economic activity at this stage will lead to the permanent closure of businesses, thereby leading to millions of job losses. Restrictions and rising cases have already impacted sales of the auto sector. The real estate sector, which is highly dependent on migrant labour, is expected to be affected if the lockdowns trigger a second reverse migration. The number of air travellers has also been plummeting over the last few weeks. The sector faces a bleak outlook as the second wave continues unabated.

Why saving the middle class is critical for India

Unlike other countries such as China, which controlled the virus much sooner, or the US and the UK, which despite being hit hard by Covid had the financial resources to protect the livelihoods of their people, India has suffered grievously. Starting April, it was expected that India’s economy will register a fast economic rebound and make up for 2020’s losses but the massive surge in Covid cases all across the country, which has exposed the government’s lack of preparation over the past year, points to the possibility of a scenario where India may not even be able to make up for the economic (GDP) contraction it suffered in the last financial year (2020-21).
Such a sharp contraction in GDP growth essentially means that millions of people will not only lose part or all of their current incomes but also the means to earn their income. Since India’s economy was already decelerating before the pandemic, people do not have the savings to fight for long. A lot of focus has been on the pitiable state of India’s migrant workforce, but there is an equally primal but largely unheard shriek of desperation being let out by India’s middle class.
Typically economic researchers tend to use income or expenditure to spot the middle class but it’s possible to define the middle class as those whose expenditure ranges between 75% to 125% of the median expenditures. It is also characterised by certain values, mindsets, educational and occupational choices.
The middle class is often considered the glue that keeps modern liberal democratic economies from falling apart under the strain of ever-rising inequalities. Beyond the political aspect, it is now well established that economic growth is stronger in countries that have a strong middle class. Middle class “values” also encourage the accumulation of human capital and savings. Moreover, in comparison to the poor, the middle class has the ability and power to demand better public service delivery and greater accountability from public officials, and support growth-oriented policies but the world over, the middle class has been shrinking and this trend is considered worrisome. Nationalistic and anti-globalization sentiments can arise because a shrinking middle class produces disillusionment and damages political engagement, or turns voters towards anti-establishment and protectionist policies. In India the middle-class had come under severe strain even before the pandemic. Unemployment levels had risen to a 45-year high even as consumption expenditures had fallen sharply. Health and nutrition data also showed a significant decline even as educational outcomes continue to lag. National accounts data showed Indians getting more and more indebted since 2017.
Prior to the pandemic, it was anticipated that 99 million people in India would belong in the global middle class in 2020 and a year into the pandemic, this number is estimated to be 66 million, cut by a third whereas, the number of poor in India is projected to have reached 134 million, more than double the 59 million expected prior to the recession.
While the fact that 75 million people will be pushed back to abject levels of poverty what is worrisome is that fact that India’s middle class was reduced by one-third. Given its severity, the current second wave and its economic impact could well mean that India’s middle class will be reduced to half of what it was before the pandemic.
But this situation needs to be remedied as soon as possible because a politically and economically strong middle class is more likely to hold a government accountable, which would, in turn, ensure the rule of law, protection of property rights, and continued economic reform. More specific to the Indian middle class, the starting point has to be a reordering of the taxation and benefits matrix. In other words, the overall tax burden should be reduced even as the benefits such as public healthcare and education are ramped up. Doing this would necessarily require the government to make the tax system more progressive and demand higher taxation from the rich. The government must do everything it can to bring down the cost of living for the middle class. The third big thrust has to be to address the lack of jobs and falling labour force participation rate.

How is Ingenuity, the first helicopter on Mars historic?

 This week NASA announced that Ingenuity had performed its first flight. The helicopter’s main task is to carry out a technology demonstration to test the first powered flight on Mars, which it seems to have accomplished today. Since the first flight has succeeded, the Ingenuity team will attempt up to four test flights within a 31-Earth-day window. Other technology demonstrations of the same kind include the Mars Pathfinder rover Sojourner and the Mars Cube One CubeSats that flew by Mars in 2018.
Ingenuity, the first helicopter to fly on Mars was carried by NASA’s rover called Perseverance that was launched in July last year and will help collect samples from the surface from locations where the rover cannot reach. The helicopter got its name because of a high school student Vaneeza Rupani of Alabama. Rupani originally submitted the name for the Mars 2020 rover, which was ultimately called Perseverance. But the NASA officials felt that Ingenuity–which means the skill of thinking, performing, or using things in new ways, esp. to solve problems (definition as per the Cambridge dictionary)– was a suitable name for the helicopter whose team had given a lot of creative thinking to get the mission off the ground.
Perseverance landed at the Jezero Crater of Mars in February year. It will remain on the Red Planet for about two years and look for finding past signs of life. The rover is designed to study signs of ancient life, collect samples that might be sent back to Earth during future missions and test new technology that might benefit future robotic and human missions to the planet. The helicopter’s mission is experimental in nature and completely independent of the rover’s science mission – which is searching for signs of ancient life and collecting samples of rock and sediment in tubes for potential return to Earth by later missions. NASA will try and demonstrate rotorcraft flight in the extremely thin atmosphere of Mars with this helicopter, which is why the mission is so crucial.

covid

The Oxygen Conundrum

While 120 Crore people in this nation fight against a deadly virus and its new mutant or variant there are those fighting for a breath of life. With hospitals operating at more than double the capacity there is a shortage of oxygen supply in most major hospitals of the capital city. Delhi sources it’s oxygen from industries based in Faridabad, Haryana where the Delhi government has no jurisdiction; while the Haryana government placing more importance in the lives of the residents of the state of Haryana and post a gruesome murder of humanity refused to let the oxygen carrying trucks leave the state borders.
The center was caught up in another dilemma with Max Hospital approaching the Delhi High Court and bringing the court up to speed on the oxygen situation in the city and requesting it to step into the matter, the court asked the center to sort out priorities, if the lives of the people who make up the nation were more important than those of the industries dependent on oxygen. In a rather ‘iconic’ moment the Delhi high Court asked the center to ‘beg, borrow, steal’ and it was the center’s job to provide oxygen to the people.
It is in situations like these that you question yourself and the high and mighty, how did they prioritize the lives of one state over the other; when did the profits of an industry become more important than the lives of the people of this nation. While the center boasts about the 1.18% fatality rate in the country it fails to realize or maybe uses a relative concept such as percentage as a ruse to conceal reality, 1.18% in a population of 120 crores is close to 1 crore, those are 1 crore deaths that this government of the high and mighty have rendered a small number. Those were living, breathing human beings whose lives you have so blatantly disregarded. Beds in AIIMS shall always remain empty for those that remain in power, but for those who have no choice but to sleep outside AIIMS Delhi due to lack of resources, the gates shall always remain shut.
Humanity often loses in a fight against the high, the mighty and the rich. It will always lose against those that run this nation.

podcasts

The Connectere Podcast #108: Chaebols & Keiretsus

The Connectere Podcast is an initiative to bring forth innovative ideas and opinions of the youth forward via the digital medium. Tune in to this episode of the podcast where Aashi takes you through a very intriguing topic- Chaebols & Keiretsus

Here is the Spotify link for the podcast – https://open.spotify.com/show/4lBNc63mANGyz0iJ80WsOt

belt and road

BELT AND ROAD INITIATIVE

The hegemony of the United States has been far too prominent since the end of the Cold War and the disintegration of the USSR. Capitalism has taken over world economics, and “the west” is seen as the ideal for the globe. If there is any country that can dare challenge or potentially prove to be a threat to this hegemony is surely the People’s Republic of China. The world’s most populated country is not only a production capital but also the most influential power in the east where almost 60% of all the people in the world reside. The Belt and Road Initiative is one such plan, that could shake the western world and put China’s name right next to the US. 

Forwards and Futures Contract

Suppose a farmer grows tomatoes and enters into a contract to supply 5000 kg of tomatoes to the ketchup factory which is situated far away. The ketchup factory arranges to pick up the tomatoes from the farm and transports them to the factory directly. The tomatoes are supplied at the market prices prevailing on the date of supply. Having said that, both the farmer and the ketchup factory have to face the price risk, as neither of them is sure about the prevailing market prices on the day of supply. This is where a basic forward contract comes into picture. 

A forward contract is an agreement between a buyer and seller wherein an asset is traded at a future date. Settlement of the price of the asset is done when the contract is drawn up. Forward contracts are settled at a particular date at the end of the contract. These contracts are not traded on an exchange as these are private agreements between two parties. Because of the nature of the contract, these aren’t as rigid in their terms and conditions.

Going back to the above example, the farmer needs a minimum price of Rs.30 per kg to cover his costs and make a profit. So he wishes to sell tomatoes to the ketchup factory at a minimum price of Rs.30 per kg exactly 3 months from now. But the Ketchup factory can buy tomatoes from the farmer at Rs.33 per kg at the end of 3 months. At this price, the ketchup factory can cover all its costs including transportation and also make a margin.

A 3-months forward contract is initiated under which the farmer will supply 5000 kg of tomatoes to the ketchup factory at the end of the 3 month period at a price of Rs.31.5 per kg. Both the parties can be benefitted at this price. For the farmer it is Rs.1.5 better than the minimum price that he is expecting to be profitable in the market. Whereas, for the ketchup factory it is Rs.1.5 lower than the cost at which the factory can be profitable.

There can be three possibilities on the date of maturity of the forward contract: 

  1. The price of tomatoes in the market on the maturity date may be Rs.31.5. In this case, both the parties will fulfill their obligations and execute the contract.
  2. The price of tomatoes may fall. Say, the price is Rs.27. Under this forward contract, the farmer will make a profit of Rs.4.5 per kg as he will get Rs.31.5 per kg instead of the market price of Rs.27. However, the ketchup factory will be in a loss as they have to honour their part of the forward contract at Rs.31.5, when they could have bought it in the open market at Rs.27.
  3. The price of tomatoes may rise. Say, the price is Rs.35. Now the farmer makes notional loss of Rs.3.5 per kg as he will get only Rs.31.5 per kg instead of the market price of Rs.35. Whereas, the ketchup factory can procure the tomatoes at Rs.31.5, for which they would have had to otherwise pay Rs.35 per kg.

It is important to note here that although the forward contract is the right and the obligation for the parties, the profits or losses can also be unlimited to both. But it gives a degree of certainty to the farmer and the ketchup factory. The farmer gets assurance of his income irrespective of market conditions and the ketchup factory knows its costs of procurement and can plan its budgets accordingly. 

Forward contracts do sound good, but there are a lot practical difficulties. What if any of the party is unable to honour their side of the contract? The default may be intended or unintended. Either ways, the other party will be put through a lot of trouble. Of course, forward contracts are regulated under the Contracts Act and hence the contract can be enforced in the court of law. But, that is a very long and cumbersome process and the parties to a forward contract may have neither the time nor the resources to pursue prolonged legal recourse.

There may also be a case where either of the party wants to exit the contract midway for some genuine reasons. After entering into a forward contract, parties are under an obligation and cannot exit the contract. They can do so if they are able to find another similar party who is willing to honour the contract on their behalf. Forward contracts tend to become illiquid due to their uniqueness to specific circumstances. It is to address these problems that the concept of futures transaction comes into play.

Just like forwards, futures contracts involve an agreement to buy and sell an asset at a specific price at a future date. But the two aren’t exactly the same.

Futures contracts are marked-to-market daily. Daily changes are settled day by day until the end of the contract. Furthermore, a settlement for futures contracts can occur over a range of future dates.

As futures are traded on an exchange, they have clearing houses that guarantee the transactions. This lowers the probability of default. Future contracts are available on stock exchange indexes, commodities and currencies. Crops such as wheat and maize, and oil and gas are the most popular assets for future contracts. The market for such contracts being highly liquid gives an option to the investors to enter and exit at their own will. 

These contracts are often used by speculators who bet the price movement of an asset. Such contracts are closed before maturity and generally never delivered. There is usually a cash settlement in this case.

To sum up, forwards are private contracts so they work on good faith. However, when you enter into an exchange-traded futures contract, you get a real idea of the costs. There is a margin that the exchange collects in advance when you enter into a future contract. The exchange margins are defined as the initial margins consisting of the VAR margin and the extreme loss margins. In addition, if prices move against the Party, the exchange also collects mark-to-market margins (MTM). Whether you are a buyer or a seller in a future contract, the initial margins are similar. Only the MTM margins vary depending on which side of the contract you are on. 

References:

Article on Forwards and futures in commodities 

Article on Forwards Vs futures contract dated Jan 18, 2020

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