Ghost Protocol; Volume 68 / February 2012

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JOURNAL OF THE SECURITIES ACADEMY AND FACULTY OF e-EDUCATION

SAFE UPDATES – KEEP INFORMED TThhee SSeeccuurriittiieess AAccaaddeemmyy aanndd FFaaccuullttyy ooff ee--EEdduuccaattiioonn

Editor: CA Lalit Mohan Agrawal

Ghost Protocol;

INDEX Month: February 2012 Title: Ghost Protocol – Will US Economy Save The World Again? Editor : CA Lalit Mohan Agarwal

68th Financial Advisor Practice Journal S.No. Section Name Topic

1.1 Editorial Preamble: Ghost Protocol Schadenfreude

1.2 Stock Markets Souring Sentiment On India 3rd Week of December: Sensex up 247 points Sensex to face many headwinds ahead 4th Week of December: Sensex down 284 points Sensex, Nifty plunge 24% in a ‘terrible’ year How could you allocate your assets in 2012? 1st Week of January: Sensex up 413 points India’s Sensex gains in New Year’s Eve 2nd Week of January: Sensex up 287 points Sensex posts highest weekly close in five weeks 3rd Week of January: Sensex up 584 points Sensex gains for 3 consecutive weeks 4th Week of January: Sensex up 495 points Rupee, Sensex climb to 11-week high

2.1 Indian Economy India Must Leave Inaction Behind

2.2 International US Dollar Regaining Ground Will the US economy save the world again?

2.3 Warning Signals Europe’s Vicious Spirals The Straits of America Emerging Markets: Will it fall in 2012? India’s Year of Living Stagnantly

3.1 Currency Market Address Basics 3.2 Commodity Market Duty hike on Gold

4 Financial Sector – Transforming Tomorrow World Economic Forum

4.1 Financial Advisors Beating the Burnout at Davos 4.2 Financial Planners The Great Transformation: Shaping New Models 4.3 Risk Management Consultants Taking Back Globalisation

High Food Prices: A Blessing in Disguise? 4.4 Credit Counsellors Leaders slam eurozone 'foot-dragging' on debt 4.5 Issues Of The Present Fallout from the crisis could last the rest of this decade

At World Economic Forum, Fear of Global Contagion Dominates

5. Central Banks European Banking Authority Stress Tests

6. Inflation Inflation: Tackle it Effectively 7 Knowledge Resource India’s Anti-Corruption Contest

Words From The Managing Trustee

The World’s Major Economies Share Many More Vulnerabilities Than Is Commonly Supposed.

Ghost Protocol; Editorial preamble 1.1 GHOST PROTOCOL

幸灾乐祸

The protracted financial and economic crisis discredited first the American model of capitalism, and then the European version. Now it looks as if the Asian approach may take some knocks, too. Coming after the failure of state socialism, does this mean that there is no correct way of organizing an economy? In the aftermath of the subprime crisis and the collapse of Lehman Brothers, fingers were pointed at

the United States as an example of how badly things could go wrong. The American model further weakened first by the Iraq invasion, and then by the financial crisis. Anyone who dreamed of the American way of life now looked stupid. Immediately after Lehman Brothers’ collapse, German Finance Minister Peer Steinbrück put this diagnosis as a challenge not only to the US, but also to other countries – notably the United Kingdom – that had “Americanized” their financial system. The problem, Steinbrück argued, lay in over-reliance on highly complex financial instruments, propagated by globalized American institutions. Criticism of America did not stop there. Steinbrück’s successor, Wolfgang Schäuble, persisted in the same tone, attacking “clueless” American monetary policy, which was supposedly designed only to feed the American financial monster. But such criticism ignores the problems faced by banks that did not use or deal in complex financial products. Bank regulators had long insisted that the safest possible financial instrument was a bond issued by a rich industrial country; then the outbreak of the eurozone’s sovereign-debt crisis, with its roots in lax government finance in some countries. Critics now had a new focus. Naturally, many conservative Americans were delighted by the imminent failure of what they saw as Europe’s tax-and-spend model, with its addiction to a costly and inefficient welfare state. They were not the only critics. The chairman of China Investment Corporation, Jin Liquin, commented skeptically on a proposed Chinese bailout of Europe, which he called “a worn-out welfare society” with “outdated” welfare laws that induce dependence and sloth. But such criticism captures only one small part of Europe’s difficulties. The fiscal problems of Greece and Spain were also the result of spending a great deal on high-technology and high-prestige projects: facilities for the Olympic Games, new airport buildings, and high-speed train links. And Spain and Ireland before the crisis did not have a fiscal problem, owing to the rapid economic growth produced by a real-estate boom that seemed to promise a new era of economic miracles. One of the most widely used Chinese terms of recent years is 幸灾乐祸 (xìng zāi lè huò), best translated as “schadenfreude”: to rejoice in other people's misfortune. Asian critics looking at America and Europe could easily convince themselves that the Western model of democratic capitalism was collapsing.

Ghost Protocol; But haven’t similar capital investments and soaring property prices also been an increasingly important part of China’s transformation since the 1990’s? Chinese citizens are now not only frustrated with the high-speed trains’ increasingly obvious imperfections and inadequacies, but are also wondering whether their government has set the right priorities.

Shadenfreude comes in several flavors. Russia’s Prime Minister Vladimir Putin and Argentina’s President Christina Kirchner liked to think that their versions of a controlled economy and society built in the aftermath of default on foreign debt offered a more viable alternative to cosmopolitan international capitalism. Both now face major problems with disillusioned populations.

In short, the world’s major economies share many more vulnerabilities than is commonly supposed. A response to global challenges based simply on schadenfreude may promote a short-term sense of well-being, as people often like to think how lucky they are to have escaped a mess that originated elsewhere. But soon they encounter their own problems; indeed, today’s global economy is a riot of slipping economic models. And tomorrow the cacophony will be even louder.

So, is there any absolutely sure way of organizing economic life? If the quest is for a way of securing perpetual security or dominance, then the answer is “no.” In a market economy, however, competition rapidly leads to emulation, and high profits associated with an original innovation turn out to be transitory. From a longer-term perspective, there are only temporary surges of relative wealth, just as there are only temporary surges of apparent success in a particular way of doing business. During the Industrial Revolution in Western Europe in the late eighteenth and early nineteenth centuries, the pioneers and innovators in textiles, steel, and railroads were not, on the whole, rewarded with immense riches: their profits were competed away. The late nineteenth and the twentieth century produced a different sort of growth, because public policies and resources could be used to protect accumulated wealth from the otherwise inevitable erosion stemming from competitive pressure. Underpinning comparisons of different models is the wish to find an absolutely secure way of generating wealth and prosperity, and the belief that a sensibly ordered state could somehow capture and eternalize the fruits of economic success. Like it or not, states cannot organize themselves in that way any more than individuals can.

Ghost Protocol; 1.2 STOCK MARKETS

Souring Sentiment on India India is definitely not in the good books of brokerages as Ruchir Sharma, MD & global head of emerging markets at Morgan Stanley points out, the sentiment on India is souring. In his book - Breakout Nations, Sharma says the focus must shift to other emerging economies beyond China and India. The operating assumption is that the bear market regime is still on. We know that the popular thing to ask just now is will 2012 be any different from 2011 and the key thing to remember here is that markets don’t care about calendar years. So just because a new year begins doesn’t mean a new trend is about to begin. The bear market regime looks most entrenched in emerging markets. The big surprise in 2011 is how resilient the US market has been and the fact

that the Q4 of this year, the US economy in the midst of all this talk of a global slowdown is likely to post a GDP growth rate in the 3.5% to 4% range, which is an extraordinary performance. However, many emerging markets, which we thought were going to be the superstars, are being questioned. So, at this time last year, the big debate was that when will India overtake China as the fastest growing economy in the world, that debate is now being turned on its head which is that both India and China are slowing down and the question is which economy will slow down even more in 2012? The trend reversals take place just when the conventional wisdom becomes very strong. So, over the past decade, it became popular to say- the decline of the West and the rise of the rest. That trend could well start showing some signs of reversal, the two economies showing the maximum resilience at this stage are US and Germany in the midst of this entire turmoil. In US and Germany even the expectations became very low and hence, those expectations are now being easily surpassed. At the same time, in the emerging markets expectations got too high, in terms of what they could achieve, and those are now being undershot. Markets trade at the margin, in terms of what the rate of change is and the rate of change seems to be more positive in those markets and more negative in emerging markets.

On the US dollar I am more confident. The US dollar over the past decade, on an inflation adjusted trade weighted basis has lost one third of its value. We were looking at some of our long term charts and it shows that the US dollar now is at the cheapest level it has ever been in its history. So, it is competitive and a lot of the emerging market currencies have become quite expensive and so the big reversal is taking place.

For many foreign investors a big part of the returns in emerging markets, over the past few years came from currency appreciation and that trend has exhausted itself. Hence, I think that in the US dollar today is quite likely that the bear market we saw in the dollar, over the past decade where it lost a third of its value is coming to an end and we are likely to see a higher dollar versus many currencies over the next few years. However, these currency trends take a long time to play out but that’s the sort of nature of game in currencies, where the trends tend to reverse.

Ghost Protocol; There has been a lot of talk here about the rupees performance and how its one of the worst performing currencies in the world. We think it was high time that the rupee corrected. At our per capita income, we need an undervalued currency not an overvalued currency to be able to grow. The rupee now has corrected for that. If you look at it on inflation adjusted basis, on a three-year basis the rupee has virtually unchanged. So, this has really been an event of this year and markets always do that, which is that they don’t price something in for long time and then in a digital manner they price something in a very short span of time which is what has happened with the rupee. Barring some sort of macro economic crisis, it does seem to me that the rupee’s big decline is over but all the other emerging market currencies are still quite overvalued. The Indian stock market today is back to where it was in December 2005 in on inflation-adjusted terms. But,

the behavior of the Chinese market is in fact more disturbing. The Chinese stock market today is basically where it was 5 years ago. It is even worse if one does an inflation adjusted return. But the real story here to me and the real risk could be China which is that people are so used to seeing China print growth numbers of 8-9% every year. If China grows at less than 7% even for a couple of quarters in 2012 that could really shock a lot of people because no one expects China to do that. Since

1997, China has not recorded a growth rate of less than 8% in any single year. To see them adjust to that realty could be something, which could send a lot of tremors in the global market. China has accounted for about 50% of incremental oil demand over the past decade and 75% of incremental oil demand over the past three years. If China has a bit of a wobble it may sort of contaminate the whole emerging market universe. Then you end up getting a clearing out process, where some of the commodities importing nations gain the new leadership and a new bull market begins on the back of this. But the market has been sensing much more trouble than what the analyst have let on. However, in emerging markets, the way we are positioning ourselves in the coming decade will be very different from the past decade. The leaders of the past decade included commodities, were all driven by the China growth story and we think that in the decade going forward, it is bound to change as most things do once the decade is over.

Sentiment about India has already soured quite a bit. And, there is no catalyst apart from lower commodity prices which gets us a sustainable bounce. We cannot have a bull market begin where every time the index in India goes up by 5-10% because of global factors; commodity prices led by oil also go up by 5-10% that becomes self defeating. We need that psychology to break for us to get a sustainable advance. Until then it’s hard to sort of get out of this bear market regime. In the previous bull market, which took place from 2003-2007, we were pretty clear about that, but that was due to global factors, including what

happened in India. However, what we got was that emerging markets had a terrible time in the 1990s and their balance sheets were cleaned out after that both at the corporate level and at the government. Valuations became very cheap and then from 2003 we have this flood of easy money, starting out from the US and booming demand in the developed world that shot up the emerging market growth rates.

Ghost Protocol; So, emerging markets till 2002 were averaging a growth rate of about 3.5%, from 2002 onwards the growth rate doubled to 7% and that was the average till 2007. What happened in India was exactly similar that a growth rate was 5.5-6% and 2003 onwards our growth rate went up to 8.5-9%.

Hence, everyone here in India thought this is about us, but in fact it was a rising tide that was lifting all boats and that boom came to an end in 2007, when in 2009 and 2010 we all used monetary and fiscal stimulus to try and revive that boom, which took place from 2003-2007 and we were able to carry that on for a short while. However, in the end what's happening in India is that the growth rate is coming back to its trend line of possibly around 6-7%.

Some people tell that in India if you get a growth rate of 6-7%, it is still very good compared to what the global economy is going to see. However, the point here is few things need a major adjustment process. A lot of our companies, our macro economic finances are geared towards the growth rate of 8-9% and that adjustment to a 6% growth rate or 7% growth rate really requires a lot of pain, especially at our sort of per capita income level. Also, the signaling process is not that strong currently. If you look at the priorities of the government, its still is very much about how to redistribute the pie rather than grow the pie. When that’s happening that is not a very encouraging sign. The incentive is still to get something like a Food Security Bill passed rather than get any major new reforms passed. That’s what they did in 2003 to 2007 where they spent a lot, but they were able to sustain because of high revenue growth. Now it’s the opposite, which is that they think that this revenue growth slowdown is just temporary in nature and it will end soon and we can sustain this spending. But, this growth rate is not going back to 8-9% any time soon and we can’t keep spending at the way that we did over the past five to seven years. That is a real disappointment to people like us who want the India story to shine out there. Investors are a fickle minded lot and what they tell you today, you should not take too seriously because often in six-12 months the views can change. But a lot of hype about India is deflating very quickly.

Ghost Protocol; 3rd week of December 2011: Sensex up 247 points Daily review 16/12/11 19/12/11 20/12/11 21/12/11 22/12/11 23/12/11 Sensex 15,491.35 (112.01) (204.26) 510.13 128.15 (74.66) Nifty 4,651.60 (38.50) (68.90) 148.95 40.70 (19.85)

Weekly review 16/12/11 23/12/11 Points % Sensex 15,491.35 15,738.70 247.35 1.60% Nifty 4,651.60 4,714.00 62.40 1.34%

Sensex to face many headwinds ahead BSE gains over 1%, broader market down

India's benchmark share indices ended over 1% higher in the week to December 23. However, the broader market continues to remain weak as investors shunned investments in mid-caps and small-cap shares. For the week ended December 23, the 30-share Sensex ended at 15,738.70 up 247.35 points or 1.60%. The S&P CNX Nifty closed at 4,714 rising 62.40 points or 1.34%. On Monday, Markets ended lower for the fourth straight session, slumping to fresh 2-year lows in intra-day trades,

after recent data vindicated that India's economic growth is slowing down. The Sensex touched a fresh 28-month low of 15,191 and the Nifty touched a low of 4,560, the lowest level for both indices since 21/08/2009. On Tuesday, share indices ended lower further for the 5th straight session. On Wednesday benchmark shares indices ended over 3% higher, snapping a five day losing streak. On Thursday, share indices ended higher again, led by banks after slump in food inflation to 4-year lows, rekindled hopes of rate cut by the central bank sooner than expected. Food inflation eased sharply to 1.8% in the year to December 10, from an annual 4.35% rise in the previous week. Food inflation fell sharply to a near four-year low as prices of essential items like vegetables, onion, potato and wheat declined. The RBI governor Thursday said that India’s GDP will be below 7.6%. In its second quarter review of monetary policy 2011-12 the central bank had revised the baseline projection of GDP growth for 2011-12 downwards to 7.6% from 8% earlier. Indian stocks ended lower on Friday; on rising concerns that India's growth is likely to be lower than the central bank's revised forecast of 7.6% for 2011-12. This week trading volumes were thin due to the upcoming Christmas holidays. The trend may continue in the coming week as well with many markets shut for year-end holidays. For the Indian markets, next week will be important given the F&O expiry on Thursday. Markets will also be partly driven by the political developments, as the parliament resumes after the Christmas break to debate the New Lokpal Bill. Focus may soon shift to January and outlook for New Year. Foreign institutional investors have been selling everyday in our market. They have been net sellers of local stocks worth more than $500 million so far in 2011, a far cry from record net inflows of more than $29 billion in 2010. The market sentiment also dampened after global equity research firm CLSA cut its forecast for Indian economic growth to 6.7% for the current fiscal year from its earlier projection of 7.3%, as high interest rates take a toll, with policy inertia and corruption scandals hurting confidence.

Ghost Protocol; 4th week of December 2011: Sensex down 284 points Daily review 23/12/11 26/12/11 27/12/11 28/12/11 29/12/11 30/12/11 Sensex 15,738.70 232.05 (96.80) (146.10) (183.92) (89.01) Nifty 4,714.00 65.00 (28.50) (44.70) (59.55) (21.95)

Weekly review 23/12/11 30/12/11 Points % Sensex 15,738.70 15,454.92 (283.78) (1.80%) Nifty 4,714.00 4,624.30 (89.70) (1.90%)

Sensex, Nifty plunge 24% in a ‘terrible' year

The BSE Sensex closed 0.6% lower on Friday and posted its first annual fall in three years as a combination of near double-digit inflation, high interest rates, slowing domestic growth and policy inaction turned off investors already shaken by global headwinds. The benchmark's fall in 2011 was only the second annual decline in a decade. The Sensex ended down 0.57% at 15,454.92 on Friday.

‘Terrible' and ‘peculiar' is how market-men described calendar 2011. The benchmark indices fell 24 per cent and the Indian market was among the worst performer in the world during the year. Market experts are of the opinion that high interest rates, rising inflation, leadership crisis, slower GDP growth rate and the depreciating rupee still continue to be major concerns. The year started with rising crude oil prices due to political turmoils in oil-producing countries such as Libya. By then Europe had already become a worry with countries like Greece and Ireland having run up huge debts. But what triggered the fall in the markets was the August downgrade by Standard & Poor's of the US ratings. Soon, markets the world over lost ground. Indian markets followed suit. The depreciation of the rupee was the last straw for the Indian markets. The falling rupee accompanied by rising crude oil and fertiliser prices, squeezed profit margins of companies. The BSE Bankex fell 32 per cent this calendar year, while IT and pharma indices fell 15.62 per cent and 13.2 per cent respectively. The BSE FMCG index, the best performing sector for the year, grew about 9.3 per cent during the year. Volumes in the cash market dropped through the year while that of the derivatives market increased. There was not good news in the IPO market either. According to estimates, a total of Rs 14,000 crore was mobilised through IPOs. IPOs finished up the wealth of the investors. Retail investors were caught at the fag end of the bust. Most of the scrips are trading 70-80 per cent below their listing prices. This year was terrible for our markets. Next year may also start on shaky ground. Corporate earnings need to grow, only then will the confidence among the investors come back.

Ghost Protocol;

Yearly/Quarterly Review

Month

December

2007

December

2008

December

2009

December

2010

March 2011

June 2011

Sept. 2011

December

2011

Sensex

20,206.95

9,647.31

17,464.81

20,509.09

19,445.22

18,845.87

16,453.76

15,454.92

Points

Base

(10,559.64)

7,817.50

3044.28

(1,063.87)

(599.35)

(2,392.11)

(998.84)

%

Base

(52.26%)

81.03%

17.43%

(5.19%)

(3.08%)

(12.69%)

(6.07%)

Dalal Street sheds 24.64% in 2011 on interest rates, inflation, rupee fall, global uncertainties The bellwether BSE Sensex shed 24.64% in 2011 in the wake of high inflation, higher interest rates, depreciating local currency, slowing domestic growth and global uncertainties. This is the first annual fall in the Sensex in the last three years. Seven out of 13 sectoral indices on the BSE have done worse than the BSE Sensex in 2011, while only the fast-moving consumer goods (FMCG) index bucked the trend and ended the year with positive returns of over nine per cent.

The Sensex had reflected the general negative sentiment, when it closed 0.57% or 89 points down at 15454.92 points on the last day of 2011 on Friday. For the full year, the Sensex shed 5,054 points from its 2010 close of 20,509.09 points. However, in dollar terms the fall of the Sensex is even steeper at 36.74%. A depreciating rupee, usually, erodes the take-home value of foreign institutional investors' (FII) investments. The Dollex-30 index of the BSE, which captures the dollar value of Sensex, slid from 3,761.83 points at the end of 2010 to 2,379.90 points on Friday. The fall in the Dollex-30 could be attributed to a steep fall of about 16% in the rupee against the dollar in 2011. The rupee, which touched Rs 43.85 per dollar on July 27, closed at Rs 53.01 on Friday.

Ghost Protocol; How could you allocate your assets in 2012?

It's that time of the year when investors ask what the coming year will hold for them. If only the markets go by predictions, we could all be rich. Since they don't, it is not a great idea to reallocate assets based on the market view alone. Taking a market view means tuning the allocation to macro realities so that losses are reduced. The tactical asset allocation exercise is,

therefore, about risk assessment of risk factors, and the agility to rework if assumptions don't materialise. The negative run in the equity market has made everyone anxious. Bad news comes in every day and the markets are enveloped by pessimism. Many see 2012 as a lost year for equity since the much-needed economic reforms, may not happen. Corporate profitability has taken a hit and lower industrial production numbers point to lower growth in sales. There is also little hope of foreign investors returning to India with a high allocation since the macro-economic fundamentals do not look good. There are two points to consider before deciding on equity allocation in 2012. First, the equity markets lead the changes in the economic cycle. This means that the markets will bottom out much before all the indicators turn positive. To wait for things to improve before making an investment means to make a late entry, this also translates into a delayed participation in the next up cycle. Second, bear markets require an acute eye for a bottom-up investing, choosing companies carefully for their ability to bounce back.

Investors were enamoured in 2011 by the high returns on short-term debt and deposits. In 2012, if the interest rate policy eases due to a lower inflation level and the need to support economic growth, these products will be the first to respond to such changes. The return in short-term debt will directly map where the policy rates are and will come down with it. Fixed maturity plans and deposits may begin to offer lower interest rates, and slowly, move down in the popularity stakes.

Gold has been the default choice for investors who did not like the risk of the equity markets and high rates of inflation. As we look at 2012, it is obvious that the circumstances that pushed up gold prices may not continue in the future. If no new shocks are expected, gold can begin its long-awaited correction.

Any contraction in the economic cycle is not good news for real estate or commodities. At the turn of the cycle, both real estate and commodities tend to suffer a correction, many a times doing so ahead of the cycle. Allocating assets means acting on the basis of information we now have, and making decisions in the present after making reasonable assumptions about the future. The focus needs to be on risk, not

return alone. We will then know what to look for and the kind of adjustments to make in the future.

Ghost Protocol; 1st week of January 2012: Sensex up 413 points Daily review 30/12/11 02/01/12 03/01/12 04/01/12 05/01/12 06/01/12 Sensex 15,454.92 63.00 421.44 (56.72) (25.56) 10.65 Nifty 4,624.30 12.45 128.55 (15.65) 0.30 4.15

Weekly review 30/12/11 06/01/12 Points % Sensex 15,454.92 15,867.73 412.81 2.67% Nifty 4,624.30 4,754.10 129.80 2.81%

India’s Sensex Gains in New Years Eve

Indian stocks advanced this week on hope that 2012 will be different from 2011 and the central bank may cut borrowing costs to stoke economic growth as inflation slows. The BSE India Sensex rose 2.67 percent to 15,867.73 this week, the most since the period ended Dec. 2. The S&P CNX Nifty rose 2.81 percent to 4,754.10. Globally, Tim Condon of ING Financial Markets believes that it is going to be another year of ranged trading for risk assets. "The data has come in pretty

solidly out of the US and that’s helping sentiment to some degree, but the situation in the eurozone remains very difficult and investors are going to be dealing with uncertainty on the European debt crisis at least into the beginning of the year. So, choppy conditions are probably going to prevail." 2nd week of January 2012: Sensex up 287 points Daily review 06/01/12 09/01/12 10/01/12 11/01/12 12/01/12 13/01/12 Sensex 15,867.73 (34.08) 350.37 10.77 (138.35) 117.11 Nifty 4,754.10 (4.10) 106.75 11.40 (29.70) 34.75

Weekly review 06/01/12 13/01/12 Points % Sensex 15,867.73 16,154.62 286.89 1.81% Nifty 4,754.10 4,866.00 111.90 2.35%

BSE Sensex posts highest weekly close in five weeks The BSE Sensex rose to its highest weekly close in five weeks on Friday, on hopes renewed policy reforms by the government and easing inflation will give a much needed boost to the country's slowing economy. "There is a growing consensus that we are going to see good news on the policy front by the government. Secondly, one is getting more comfortable with the way macroeconomic indicators have behaved in the last few days. India formally eliminated restrictions on foreign investment in its single-brand retail sector, opening the door to the likes of Swedish furniture giant IKEA to open stores in Asia's third-largest economy. The government is also drawing up plans to allow foreign airlines to invest in its hard-pressed airline sector.

Ghost Protocol; 3rd week of January 2012: Sensex up 584 points Daily review 13/01/12 16/01/12 17/01/12 18/01/12 19/01/12 20/01/12 Sensex 16,154.62 34.74 276.69 (14.58) 192.27 95.27 Nifty 4,866.00 7.90 93.40 (11.50) 62.60 30.20

Weekly review 13/01/12 20/01/12 Points % Sensex 16,154.62 16,739.01 584.39 3.63% Nifty 4,866.00 5,048.60 182.60 3.75%

Sensex gains for 3 consecutive weeks, Up 8% on FII money

The market showed excellent performance for the third consecutive week led by strong inflow of money, tracking positive global cues. Gradual easing of funding problems in the eurozone, improvement in the economic data of United States, appreciation of rupee and October-December quarter earnings helped the market to rally nearly 8% in three weeks. Indian markets were among the top gainers in Asia. The Nifty jumped 3.75% for the week while the Sensex added

584 points or 3.63% in the last five trading sessions. Foreign institutional investors stepped into India with strong footing, taking exposure to about Rs 6,000 crore worth of equity shares since the beginning of 2012, very encouraging as compared to net sellers of Rs 3,642 crore in 2011. The BSE index, which slumped almost a quarter in 2011, has risen nearly 8 percent since the New Year began. Morgan Stanley said it expects the Sensex to rise 14 percent in 2012 on the likelihood of better returns on investments and attractive valuations on an absolute basis. Neeraj Dewan, director at Quantum Securities said, "The Vodafone (VOD.L) judgment is also good for market... it will boost foreign investment in India." The Supreme Court ruled on Friday that the country's tax office has no jurisdiction over Vodafone's (VOD.L) purchase of mobile assets in India, which comes as a relief to the telecom giant that has been fighting a $2.2 billion tax bill in a long-running dispute. “First, the global markets are supporting and then we are hoping that some action will be taken by Reserve Bank of India (in the policy review next week)," Dewan said. India's headline inflation slowed in December to a two-year low as food price pressure eased dramatically, but manufactured products inflation edged up from November. The rupee notched up a third consecutive week of gains, rising 2.41 percent. It was the biggest weekly rise since last week of October, according to Thomson Reuters data.

Ghost Protocol; 4th week of January 2012: Sensex up 495 points Daily review 20/01/12 23/01/12 24/01/12 25/01/12 26/01/12 27/01/12 Sensex 16,739.01 12.72 244.04 81.41 Republic 156.80 Nifty 5,048.60 (2.35) 81.10 30.95 Day 46.40

Weekly review 20/01/12 20/01/12 Points % Sensex 16,739.01 17,233.98 494.97 2.96% Nifty 5,048.60 5,204.70 156.10 3.09%

Rupee, Sensex climb to 11-week high Sensex ends above 17K this week

The Sensex rose for a sixth straight session on Friday to a 11-week high as foreign investors continued to buy local stocks on indication of a policy shift towards reviving growth, with an increase in global risk appetite also aiding sentiment. Foreign funds have pumped in more than $1.5 billion into beaten-down Indian shares this month, in sharp contrast to net outflows of about $500 million in 2011. Reliance Industries and Infosys led the rise. Reliance rose 3.7%, while Infosys jumped 2.2% The Federal Reserve surprised financial markets by saying it expected to leave U.S. benchmark borrowing costs at effectively zero until at least late 2014, considerably later than some investors had expected. And at home, an unexpected cut in the cash reserve ratio (CRR) by the Reserve Bank of India boosted investors' sentiments in the market. The RBI in its third quarter policy review cut the CRR, the amount against deposits which commercial banks have to keep as liquid assets such as cash, by 50 basis points to 5.5% from 6%. This step will release Rs 320 billion into the system.

The main 30-share BSE index closed 2.96% up at 17,233.98, its highest closing level since November 9. Jagannadham Thunuguntla, head of research at SMC Investments and Advisors said, "I think it's because of loads and loads of liquidity and above that the Fed statement that probably they will keep interest rates low till late 2014. Its value taking plus liquidity support." The benchmark has added about 11 percent so far this year. It had shed nearly a quarter last year, making it one of the worst performers in the world. "This is tomfoolery. We were the worst performing market last year and the best performing market this year. What has changed? Nothing," said Arun Kejriwal, a strategist at Research firm KRIS. He said foreign institutional investments, an improved rupee and ground-level pessimism of last year have driven the stocks up this month. The rupee touched an 11-week high on Friday on the back of dollar inflows with a growing number of foreign exchange dealers and treasury officials saying that the local currency is on course to gain further in the coming weeks. The rupee rose 1.5% from Wednesday's close of 50.11 against the dollar to end the day at 49.31 to the USD, with the gain fuelled partly by exporters selling dollars after being caught on the wrong foot in terms of the direction of the currency.

Ghost Protocol; 2.1 INDIAN ECONOMY

India Must Leave Inaction Behind Many Indians are entering 2012 with a sense of unease. The economy is slowing, infrastructure remains terrible, poverty is ever-present, and corruption seems an intractable problem. These are all legitimate concerns. But, please, take a step back and look at the big picture. And take another step back and look at the really big picture. For most of the past 2,000 years, wealth and power were

concentrated in those parts of the world with the largest populations - that is, the civilisations of what is today India and China. Then, around 500 years ago, the countries of Europe began their dominance. The industrial revolution allowed, for the first time in human history, small states to accumulate wealth and power out of proportion to their populations. With the 21st century well underway, it is becoming clear that the past 200 years have been a deviation. The big nations - China and India - are making a comeback, and we are now returning to the historical norm. But size itself does not automatically confer either wealth or power. A big state still has to take the right steps to maximise its natural advantage. So, when we ask if this will be a good century for India, we are really asking what India is doing to convert its size into increased wealth and power. The answer is: so far, not much. Look at what China has accomplished in the past three decades. It has transformed from an agriculture-driven to a manufacturing-driven economy. Its per capita GDP has grown ten-fold. It has built over a thousand universities, achieving the fastest increase in university enrolment in the history of mankind. Life expectancy at birth has increased from 66 to 73 years, and the infant mortality rate has decreased by 60%.

Chinese checkers China's economic strength has funded an increasingly forceful foreign policy. It is building a world-class navy, striking long-term deals for resources in Africa and South America, and - closer home - securing potential strategic footholds in India's backyard. China is busy constructing commercial ports in Pakistan,

Myanmar, Bangladesh and Sri Lanka in what analysts have called a "string of pearls" strategy. If commercial ports one day lead to basing rights for China's navy, this string of pearls could well strangle India. Looking out from Beijing, China's leaders see around them a host of weak states, and only one thing standing between them and complete domination of the entire Asian continent: a powerful India.

Enter the Elephant India has several important advantages over China. If it uses them correctly, it can credibly challenge China's would-be supremacy in Asia. First, India has demographic tailwinds that China can only dream of. China's disastrous one-child policy has turned that country (1.8 births per woman and 20% of the population under the age of 15) into the demographic

Ghost Protocol; equivalent of a Western European nation. India, by contrast, is not only large like China, but also young (31% of population under 15) and growing (2.7 births per woman).

Second, India's corporate sector is far stronger than China's. Indian businesses, led by English-speaking management of global calibre, will conquer global markets, just as American businesses did in the second half of the 20th century. Most companies in China, where domestic

power derives from connections with the state and where export cost advantages depend on an under-valued currency, lack the capacity to become true multinationals.

Third, India has the most talented base of technology workers in the world. Currently they are under-utilised in the outsourcing sector. India must take them out of the back office (where they use their minds to develop intellectual property for overseas clients) to the front office

(where they will develop intellectual property for Indian firms). Indian firms that move from back office to front will capture far more of the global value chain in technology than they do currently. These are just some of the advantages that can give India's economy the sustained growth it needs to fund a more aggressive foreign policy against China. Already India has begun to replace its ageing military hardware. Only a strong economy can ensure India has the capacity to match China's ongoing defence build-up. Only a strong India can halt and roll back China's incursions into the Indian Ocean area. Above all, India has one more thing that China does not: a relationship with the US bolstered by shared values. The two democracies have come a long way since the US slapped sanctions on India following the 1998 nuclear tests. Now they consider themselves strategic partners, and are cooperating across a wide range of matters, from trade to military training to intelligence sharing. But the US and India need to do more. They need to develop an alliance that is as broad, deep and strong as the Anglo-American alliance was in the 20th century. Just as the US and the UK worked together to preserve freedom last century, so must the US and India this century. As the great nations of Asia re-emerge from centuries of economic stagnation, China has gotten a big head start. If the 21st century is to be a good one for India, it must leave inaction behind and begin on the path to global power. 2012 would be a good time to start.

Ghost Protocol; 2.2 INTERNATIONAL

US Dollar Regaining Ground Portuguese-speaking concierges have of late been much in demand in New York hotels. A record number of Brazilians are floating around the city on shopping expeditions and could do with all the local help possible. The people of a country with one of the most expensive currencies in the world are flocking to a nation where the currency is about as cheap as it has ever been. Adjusting for relative inflation differentials, the US dollar by mid-2011 was at the lowest level against currencies of its trading partners in its

floating rate history, which dates back to the end of the Bretton Woods system in the early 1970s. While the Brazilian real is an extreme case, lying at one end of the valuation spectrum, the multilingual cacophony on Fifth Avenue suggests tourists from other parts of the world too are finding the US a bargain. Tourism on its own hardly dictates a currency's trend but other data - from US exports to foreign direct investment, or FDI, inflows - reaffirm the greenback's highly competitive position.

After steadily declining for many decades, the US share of global exports is beginning to tick higher from a low of 8% in 2008. FDI inflows have picked up meaningfully over the past decade and are currently running at 1.5% of US GDP compared to the mere 0.5% share in 2002. These flows are all working to narrow the US current account deficit from a peak of nearly 7% of GDP at the height of the US consumption boom in 2007 to 3% now.

The long-talked-about trade imbalance should narrow even more in the years ahead as the US import bill for energy falls further and some manufacturing moves back home. These trends are already in progress but are yet to be recognised by the conventional wisdom. From a low of 68% in 2005, the US is now 78% self-sufficient in terms of its overall energy needs. The ramp up in production of shale gas with new technological breakthroughs has played a meaningful role in cutting down the US import bill for energy. Perhaps more surprisingly, US imports of oil too have declined over the past five years, not just due to weak demand but also on account of an onshore production boom in places such as North Dakota, higher efficiency as well as greater use of biofuels and unconventional liquids such as shale oil. Meanwhile, a recent report by the Boston Consulting Group, or BCG, suggests that the US manufacturing sector is set for a major revival. China used to be the clear choice to build a manufacturing plant for global suppliers because of its low-cost labour, cheap currency and significant government incentives to attract foreign investment. But over the past five years, the renminbi has appreciated 20% against the dollar and China's annual inflation rate has averaged 1% more than that of the US inflation. Pay and benefits between 2005 and 2010 rose 19% annually for the average factory worker in China while the cost of employing US labour increased by only 4%.

Ghost Protocol; BCG estimates that by 2015, manufacturing in the US will be just as economical as in China for many goods made for North American consumers.

With multinationals likely to bring some production work for the North American market back to the US, the country's trade deficit could further narrow. The situation was very different a decade ago when China was just joining the WTO and the US dollar was in the midst of a powerful bull market. Between 1991 and 2001, the greenback appreciated by more than 30% on a trade-weighted and inflation-adjusted basis. That undermined the competitiveness of the manufacturing sector and contributed to the record widening of the US current account deficit. The dollar bear market of the past decade more than reversed the earlier gains with currencies of many emerging markets rising the most instead.

The Brazilian real appreciated by more than 200% against the dollar over the past decade, followed by other commodity-exporting currencies such as the Russian rouble and the Chilean peso that more than doubled in value during that period. Booming exports, surging capital inflows and stable to falling inflation rates, all abetted the trend of emerging market currency strength.

However, as is the nature of markets, the pendulum swung too far and is probably now retracing its path. Many emerging market currencies have depreciated significantly against the dollar over the past few months. The popular explanation is that the currency weakness is a function of heightened risk aversion arising from troubles in euroland. That can explain some of the volatility, but the bigger story may well be that the dollar is on a comeback trail as many of factors that led to its decline and the rise of emerging market exchange rates have exhausted themselves.

Some of the world's weakest currencies in 2011 belonged to those countries running a large current account deficit and with inflation rates much higher than the US. The South African rand, the Turkish lira and the Indian rupee fell by 15-20% against the greenback. The current account deficits of these economies ran at anywhere between 3% and 9% of GDP while inflation was close to double digits in India and Turkey. Similarly, the Brazilian real, the Chilean peso and Polish zloty declined by around 10% largely due to their current account deficit positions of 2.5-5% of GDP though all of these countries had less of an inflation problem. To be sure, if capital flows return with the sort of fervour seen in many years of the past decade, then the large current account deficits will get funded easily and not be a drag on the currencies. However, risk appetite is unlikely to get anywhere near as high as in the heydays of the 2000s. The psychological scars suffered during the serial financial crises take a long time to heal, and so will keep risk-seeking behaviour in check. Further, the domestic fundamentals of many emerging markets are deteriorating now after the vast improvements from the low expectations base of a decade ago.

Ghost Protocol; Traditional metrics such as inflation rate differentials and current account positions that long dictated exchange rate movements but were forgotten in the last decade's mad rush to chase growth in emerging markets are back on the ascendant and that situation is likely to persist for the foreseeable future. Valuation has never been a good timing tool on the currency marketplace and deviations from fair value can persist for years at a run. Usually, some catalyst is needed to correct the misalignment, and once the process begins, it can happen in very quick time. In this regard, the sharp weakness of many emerging market currencies over the past few months and, conversely, the sudden strength of the dollar is not strange behaviour. Interestingly, while the rupee's recent fall appears dramatic, on a three-year basis, the Indian currency is, in fact, unchanged on an inflation-adjusted and trade-weighted basis. While the rupee now appears to have more than made for its past overvaluation, currencies such as the Brazilian real still have a very expensive feel about them. Relatively high commodity prices are preventing a bigger decline of the real. When commodity prices come unhinged due to a likely fall-off in

commodity demand from China, the real will correct rather abruptly. The real story here is that the dollar appears to have turned the corner after a decade of underperformance. Its fundamentals are improving as evident in the narrowing current account gap and the underlying US economy is more competitive than it has been in a long time. On the other side of the equation, many economies from those in Europe to the big emerging markets are grappling with all sorts of local problems and their

exchange rates are no longer that competitive. Markets always price in any change at the margin and the dollar could be in a bull market for the next few years as its fundamentals improve relative to the rest of the world. Fifth Avenue may yet again become a primarily English-speaking zone.

Ghost Protocol; Will the US economy save the world again?

Just when it seemed the end was near, Uncle Sam seems to be coming back, staggering to his feet like Bruce Willis in one of the old Die Hard movies. In case you missed them, the plots are all roughly the same: despite a hangover and a bit of flab, armed with just a revolver and a pack of cigarettes, Bruce saves the day - no matter how many machine guns and explosives the baddies have, or how muscular they might be. A number of the latest indicators suggest that after years of beating, there's a chance that Uncle Sam

may be on the verge of just this kind of last reel Hollywood comeback. Certainly there are plenty of reasons we shouldn't expect Uncle Sam to come tottering out of the flames now, if ever. Although the Iraq war is purportedly over, an endless, expensive war in Afghanistan continues - at least $113 billion in 2011 alone. Between wars and social spending, the massive government deficit keeps getting more massive. The expensive yet inadequate health-care system eats 13% of GDP and seems likely to grow even more expensive as the Baby Boomers get older. Nor are things much better outside the government; Over 1.5 million homes are in foreclosure, and another 3.5 million homeowners are late with their mortgage payments. Unemployment is officially 8.6% but unofficially some economists say it may be nearer to 20%. Even, Americans themselves aren't very optimistic about the situation. Yet almost despite itself, the American economy seems to be looking up.

The endless euro crisis is one reason. In investing as in most of life, it's always the alternative that counts, and right now, in comparison with Europe, the US looks positively stable. With a euro collapse still a real possibility, many investors have been looking West.

S&P may now say Treasury bonds are just AA+, but the investment world evidently disagrees - or at least thinks the other alternatives are worse. Treasuries rose nearly 30% this year, bid up in part by investors seeking a safe haven. All that demand has helped push yields on the 10-year bond down to just 1.9%, making them essentially zero after inflation. In September, they dropped even further, to 1.67%, their lowest level since 1945.

US stocks had a good year too - relatively. Most of the world's major stock exchanges fell a quarter or more in 2011, making the S&P 500's flat performance (actually a decline of .003%) seems like a sort of triumph. Some of these numbers were driven by fear, but other homegrown indicators are also positive.

Private sector hiring is up in the US - 325,000 new jobs in December, much higher than the forecast number of 178,000 jobs. Layoffs seem to be bottoming out.

Ghost Protocol; Construction and manufacturing are both up, slightly. Perhaps most positively of all, demand for steel is actually higher now in the US than in Europe or Asia.

US oil imports have tumbled in the past few years, thanks in part to the rapid growth of natural gas production. Imports have declined from 60.3% in 2005 to 49.3% in 2010, driven by a rise in biofuel production and new drilling in the Gulf of Mexico. At the same time, the discovery of vast deposits of shale gas is leading some analysts to predict that the US will eventually become a net natural gas exporter. At present, government analysts estimate that there is enough gas around now to sustain the country at present rates of consumption for more than a century - double their reserve estimates just two years ago.

US companies are also sitting on at least $2.1 trillion in cash - some of it retained profits, some of it loan proceeds - all of it waiting to be ploughed into something. These iron mountains might seem prudent at the moment, given fears of a new credit crash, but between restless shareholders, leveraged-buy-out buccaneers, and legislators hungry for cash, the situation won't last forever. The United States of America is the richest economy in the world. There are any numbers of great universities, a solid corporate legal structure,

fabulous logistics networks, and as an added bonus, wages that haven't really risen in 40 years. Historically, too, investors should be reassured by the US. No matter how hard times might be or how strongly anti-business the rhetoric gets, the government has almost always found a place for business in the lifeboat. For better and worse, commercial interests have been looked after by virtually every president since the early days of the Republic.

Ghost Protocol; 2.3 WARNING SIGNALS Europe’s Vicious Spirals

The euro crisis shows no signs of letting up. While 2011 was supposed to be the year when European leaders finally got a grip on events, the eurozone’s problems went from bad to worse. What had been a Greek crisis became a southern European crisis and then a pan-European crisis. Indeed, by the end of the year, banks and governments had begun making contingency plans for the collapse of the monetary union. None of this was inevitable. Rather, it reflected European leaders’ failure to stop a pair of vicious spirals.

The first spiral ran from public debt to the banks and back to public debt. Doubts about whether governments would be able to service their debts caused borrowing costs to soar and bond prices to plummet. But, critically, these debt crises undermined confidence in Europe’s banks, which held many of the bonds in question. Unable to borrow, the banks became unable to lend. As economies then weakened, the prospects for fiscal consolidation grew dimmer. Bond prices then fell further, damaging European banks even more. The European Central Bank has now halted this vicious spiral by providing the banks with guaranteed liquidity for three years against a wide range of collateral. Reassured that they will have access to funding, the banks again have the confidence to lend. Cynical observers suggest that the ECB’s real agenda is to encourage the banks to buy the crisis countries’ bonds. But that would only further weaken the banks’ credit portfolios at a time when European regulators are desperate to strengthen them. The ECB’s decision to provide the banks with unlimited liquidity does not solve governments’ debt problems, nor is that its intent. But it at least prevents the debt problem from creating banking problems, which, in turn, worsen the debt problem without end. Europe’s second vicious spiral runs from fiscal consolidation to slow growth and back to fiscal consolidation. Tax increases and cuts in public spending are still needed; there is no avoiding this reality. But these demand-reducing measures also reduce economic growth, causing deficit-reduction targets to be missed. Getting fiscal consolidation back on track then requires more spending cuts, which depress growth still further, causing budget performance to worsen even more. At some point, recession and unemployment will provoke a political reaction. Angry electorates will boot out austerity-minded governments. And uncertainty about what kind of governments come next will not reassure investors or positively influence growth. Interrupting this second vicious spiral will require jump-starting growth, which, under current circumstances, is easier said than done. The external environment is not favorable. Economic growth in the United States is still weak, and growth in emerging markets seems poised to slow. So what are Europe’s policymakers to do? Nothing is guaranteed. But Europe can still escape its vicious spirals if everyone does their part.

Ghost Protocol; The Straits of America

Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life. And consumption growth has been relatively resilient. But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?

First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit.

At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. Indeed, firms are still trying to find ways to slash labor costs. Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holds

down capacity-utilization rates. And most capital spending will continue to be devoted to labor-saving technologies, again implying limited job creation. At the same time, even after six years of a housing recession, the sector is comatose. With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand. Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes. Thus, the vicious cycle of foreclosures and lower prices is likely to continue. Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth rate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for several reasons:

· The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast. · Slower growth in many advanced economies, China, and

other emerging markets will mean lower demand for US exports.

Ghost Protocol; · Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high. It is unlikely that US policy will come to the rescue. On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.

Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy can address only liquidity problems – and banks are flush with excess reserves.

Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.

Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the eurozone, where debt restructurings – or worse, breakup – are risks of systemic consequence; the outcome of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with Iran, instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in China; and the consequences of a global economic slowdown. Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act; they heighten the very risks that they are trying to avoid.

Ghost Protocol; Emerging Markets Will Emerging Markets Fall in 2012? Emerging markets have performed amazingly well over the last seven years. In many cases, they have far outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios, countercyclical fiscal policy, and assessments by ratings agencies and financial markets. As 2012 begins, however, investors are wondering if emerging markets may be due for a correction. The World Bank has just downgraded economic forecasts for developing countries in its 2012 Global Economic Prospects, released this month. For example, Brazil’s annual GDP growth, which came to a halt in the third quarter of 2011, is forecast to reach 3.4% in 2012, less than half the 7.5% rate recorded in 2010. Reflecting a sharp slowdown in the second half of the year in India, South Asia is slowing from a torrid six years, which included 9.1% growth in 2010. Regional growth is projected to decelerate further, to 5.8%, in 2012. Three possible lines of argument – empirical, literary, and causal, each admittedly tentative and tenuous – support the worry that emerging markets’ economic performance could suffer dramatically in 2012. The empirical argument is simply historically based numerology: emerging-market crises seem to come in a 15-year cycle. The international debt crisis that erupted in mid-1982 began in Mexico, and then spread to the rest of Latin America and beyond. The East Asian crisis came 15 years later, hitting Thailand in mid-1997, and spreading from there to the rest of the region and beyond. We are now another 15 years down the road. So is 2012 the year for another emerging-markets crisis? The hypothesis of regular boom-bust cycles is supported by a long-standing scholarly literature, such as the writings of the American economist Carmen Reinhart. But I would appeal to an even older source: the Old Testament – in particular, the story of Joseph, who was called upon by the Pharaoh to interpret a dream about seven fat cows followed by seven skinny cows.

Joseph prophesied that there would come seven years of plenty, with abundant harvests from an overflowing Nile, followed by seven lean years, with famine resulting from drought. His forecast turned out to be accurate.

Fortunately, the Pharaoh had empowered his technocratic official (Joseph) to save grain in the seven years of plenty, building up sufficient stockpiles to save the Egyptian people from starvation during the bad years. That is a valuable lesson for today’s government officials in industrialized and developing countries alike.

Ghost Protocol; For emerging markets, the first seven-year phase of plentiful capital flows occurred in 1975-1981, with the recycling of petrodollars in the form of loans to developing countries. The international debt crisis that began in Mexico in 1982 catalyzed the seven lean years, known in Latin America as the “lost decade.” The turnaround year, 1989, was marked by the first issue of Brady bonds (dollar-denominated bonds issued by Latin American countries), which helped the region to get past the crisis. The second cycle of seven fat years was the period of record capital flows to emerging markets in 1990-1996. Following the East Asia crisis of 1997 came seven years of capital drought. The third cycle of inflows occurred in 2004-2011, persisting even through the global financial crisis. If history repeats itself, it is now time for a third “sudden stop” of capital flows to emerging markets. Are a couple of data points and a biblical parable enough to take the hypothesis of a 15-year cycle seriously? Perhaps, if we have some sort of causal theory that could explain such periodicity to international capital flows. Here is a possibility: 15 years is how long it takes for individual loan officers and hedge-fund traders to be promoted out of their jobs. Today’s young crop of asset pickers knows that there was a crisis in Turkey in 2001, but they did not experience it first hand. They think that perhaps this time is different. If emerging markets crash in 2012, remember where you heard it first – in ancient Egypt.

Ghost Protocol; India’s Year of Living Stagnantly

Will 2012 prove to be a year of renewal for India, or another annus horribilis? No country progresses unerringly, but India cannot afford another politically and economically torpid year like 2011. For India, last year is a year best forgotten. India has been so deeply mired in political paralysis that the Nobel laureate economist Amartya Sen recently said that the country has “fallen from being the second best to the second worst” South Asian country, and that it is currently

“no match for China” on social indicators. This is a damning comment on a country that held such promise just a short time ago. In early January, the American social critic James Howard Kunstler described India as “a nation with one foot in the modern age and the other in a colorful hallucinatory dreamtime.” Kunstler’s view is harsh, but perhaps prophetic: India’s “climate-change-related problems are doing heavy damage to the food supply. Their groundwater is almost gone. The troubles of the wobbling global economy will take a lot of pep out of their burgeoning tech and manufacturing sectors.” Indeed, suddenly, India’s economy has begun spinning out of control. Last year, the country’s GDP growth slowed, manufacturing plummeted, and inflation and corruption grew uncontrollably. Elected and unelected government officials alike, including cabinet ministers, members of parliament, and civil servants, were implicated in corruption scandals. For the first time ever, India’s government failed to enact even a single piece of legislation, much less undertake any economic reforms, restore price stability, or address widespread civil disorder. As the Indian business analyst Virendra Parekh has observed: “The second fastest-growing economy in the world now has the unenviable distinction of having the fastest falling financial markets in Asia.” Moreover, “the fortunes of the rupee are….tightly linked with the euro, which is in the throes of an existential crisis...” Furthermore, weaknesses in agriculture, energy, infrastructure, and governance have all contributed to India’s current crisis, and the crisis will most likely continue in 2012. Another concern is nuclear power. In 2008, the United States and India agreed to a civil nuclear deal that would allow India to expand its nuclear-power capability. In 2010, India’s parliament passed the Civil Liability for Nuclear Damage Bill, a precondition for activating that agreement. But, following Japan’s Fukushima nuclear disaster in March 2011, safety concerns surrounding nuclear power are large and mounting. Local farmers, fishermen, and environmentalists have spent months protesting a planned six-reactor nuclear-power complex on the plains of Jaitapur, south of Mumbai. In April, the protests turned violent, leaving one man dead and dozens injured. India will certainly see more anti-nuclear clashes in 2012. At the heart of India’s current malaise is a paradox: rapid growth in real income has not been matched by genuine advances in living standards. If the country’s fundamental problems are to be addressed, India needs a government with the determination, integrity, and intelligence to meet the complex demands of modern governance in the twenty-first century.

Ghost Protocol; 3.1 CURRENCY MARKET

Address Basics

The recent depreciation of the rupee to historic levels has created a near-panic situation. Various solutions are being proffered: from interventions by the RBI to curbs on forex outflows. A calmer assessment of the situation makes it clear that the panic is misplaced and what is needed is deeper introspection. We need solutions rather than knee-jerk reactions and short-term fixes. But, markets are like a pressure cooker. Every one hears the whistle and heads for the door. Very few people actually see the pressure building. The pressure has been building because the macroeconomic situation over the last couple of years has turned adverse and we have not taken enough steps to address the issue early enough.

All the ingredients for the rupee fall have been there for some time: for the last year, portfolio flows have slowed down or even partially reversed, our current account deficit will shoot beyond the 3% target, the European crisis has reduced global liquidity, a lot of borrowings from 2007 are due for repayment now, our inflation has been high and FDI has slowed down significantly. So, rather than 'handle' the rupee fall, we should try and manage the underlying causes that have led to rupee falling. Most of the underlying causes - inflation, euro crisis, repayments, etc - are beyond our control. So what needs to be done is: (a) give growth impetus as inflows will increase the moment confidence in our growth is back, (b) boost inflows, especially long-term flows, and (c) reduce foreign exchange volatility. For getting growth back, the script is becoming clearer: we need fiscal control and easier interest rate scenario. There seems to be a consensus that if interest rates are hiked any more, it will start affecting growth. This means that the responsibility of tackling inflation now rests with the government with fiscal measures. It needs to reduce the fiscal deficit and, at the same time, initiate supply-side reforms. This will get confidence in growth back. We also need to boost inflows - rather than impose curbs on foreign exchange outflow. Inflows are usually in three forms: short term, medium term and long term. Short term is usually debt and quasi debt. The RBI has already eased the curbs on such short-term lending to boost inflows. The medium-term forex reserves essentially consist of portfolio inflows in the Indian stock markets. Last year has been bad for FII investments as we have seen net outflows. But once growth returns, so will the FIIs. FDI represents the long-term forex reserves. These can improve only if we start taking hard decisions about foreign investments – Because foreign investment without allowing majority controlling stakes is equal to portfolio investments. So far, policy ambiguity has led to investors postponing FDI investments. Lastly, we need to ensure that rate adjustments are continuous and not have the kind of sharp volatility we have witnessed. This can be done by classifying our forex reserves in more granular terms and having a lot more information around kinds of flows, the composition of reserves, etc. More information and discussion would mean quicker short-term adjustments rather than a huge pressure build-up and a large adjustment in one quarter. No doubt these are tough times. And alot of the above is easier said than done. But we should use the rupee fall as a catalyst to address deeper economic issues and get India on the growth path once again. But the margin for error is now small and getting smaller. We need to act now!

Ghost Protocol; 3.2 COMMODITY MARKET

Duty Hike on Gold Consumers will have to shell out more for gold and silver jewellery, bars and coins. The cash-strapped government on raised import and excise duties on gold and silver, hoping to mop up about 600 crore in additional revenue and contain its burgeoning current account deficit as the financial year draws to a close. Platinum and diamonds, too, will now attract an import duty of 2%. A government notification said customs and excise duties would be levied on the value of gold and silver instead of a fixed amount. This will allow the government to benefit from the rise in gold prices. Ad valorem duty, which rises automatically when the value of a product goes up, is preferred from the point of

view of tax policy as its facilitates easier credit besides capturing value addition at each stage. While the import duty on gold has been fixed at 2% of the value instead of the earlier Rs 300 per 10 grams, that on silver has been pegged at 6% against Rs 1,500 per kg. Excise duty on gold has been fixed at 1.5% of the value against the earlier rate of Rs 200 per 10 grams. Silver will attract excise of 4% compared to Rs 1,000 per kg earlier. At a 2% rate, the import duty on gold will double to over Rs 540 per 10 grams at current prices. The old rates were fixed four to five years ago. In the last few years, prices have increased substantially so the change has been made to bring duties in line with market prices. India is the world's largest importer of gold. The metal is the third-largest import item after crude oil and capital goods. In 2010, about 92% of India's gold demand was met through imports and the rest from recycled gold and other sources. "Gold imports alone have contributed nearly 40 basis points to the 130-basis-point increase in India's current account deficit between FY08 and FY11," global research firm Macquarie said a recent report. In first three quarters of FY12 alone, India imported $45.5 billion worth of gold and silver, up 53.8% over the year-ago period. "The move is possibly aimed at easing the negative balance of payments position as gold and silver imports have grown despite prices rising," said Madan Sabnavis, chief economist at Care Ratings. "Unlike other raw materials like machinery and fertilisers, gold and silver don't add to economic productivity as they are stashed away in bank lockers or cupboards." India's bullion traders stayed away from placing fresh orders after a nearly 90 percent hike in gold import duty was announced. In the short term traders and consumers may hesitate to buy into higher prices, the increased duty is unlikely to have significant impact on India's gold appetite in the longer term, traders and analysts said. Some time later people will digest the price rise.

India is the world’s largest importer of gold and its households have the largest holdings of the metal, according to data from the World Gold Council. Gold is popular for cultural, historical and financial reasons. Gold is seen as a safe haven that will preserve a family’s wealth over generations. There is more trust in gold bullion than paper assets such bank deposits, stocks and bonds as they have protected people throughout the world from periods of deflation (banks and governments can go bust) stagflation (paper

money and bonds lose value), and hyperinflation (paper money and bonds really lose value).

Ghost Protocol; 4. FINANCIAL SECTOR: TRANSFORMING TOMORROW

World Economic Forum As per a 'Call for Action' report published by Geneva-based World Economic Forum (WEF) ahead of its annual summit in Davos, Switzerland, "The world faces significant and urgent challenges that weigh heavily on prospects for future growth and on the cohesion of our societies." Among the major challenges for 2012, the report listed out issues like decelerating global growth and rising uncertainty, high unemployment and potential protectionist policies of different countries. The call to tackle these challenges has been made by the 11-member Global Issues Group (GIG) of the WEF, which comprises of IMF Chief Christine Lagarde, World Bank President Robert Zoellick, WTO Director-General Pascal Lamy, OECD Secretary- General Angel Gurria, among others. 4.1. FINANCIAL ADVISORS: Weigh impact on investors: Beating the Burnout at Davos

Burnout is a condition associated with exhaustion, stress, pessimism, cynicism, withdrawal and a bunker mentality. These symptoms are worrying in an individual, but can be disastrous in world affairs. In the run-up to the annual meeting of the World Economic Forum in Davos, there is a distinct sense of burnout in the air. I hope that this year's meeting will help to form a new model of leadership capable of overcoming this malaise. After a year characterised by major upheavals, many feel like

we are watching a global system disintegrate: financial and debt crises, unemployment, political paralysis, social inequality, food and energy crises, and the list goes on. Faced with so many simultaneous and interrelated problems, our leaders are stretched to their limits. At the same time, the systems and safeguards that underpin our existence as a global community are struggling to cope with today's complex set of risks. The usual reaction to all this is to call for stronger leadership. Yet, events during the past year have shown, time and again, the limits of leadership in its traditional form.

Preoccupied with domestic concerns, rushing from one crisis to the next, leaders have made little tangible progress. Instead, we have mainly witnessed short-term fixes in a rapidly unravelling world. No wonder, then, that ordinary people are losing trust in our leaders. The various 'Occupy' and 'Spring' movements around the world are signs of this understandable frustration and distress.

There is an urgent need to act. As well as finding new models to collaboratively address all our global challenges, we also need to form a new-model of leadership that is effective in the modern world: leadership that emphasises both vision and values in order to overcome the current challenges. It is this combination that can provide leaders with a compass to guide their decision-making.

Ghost Protocol; Vision is needed to interpret and deal effectively with a globalised world. Technological progress, interconnectivity and the dispersion of power have all contributed to a complex new reality, which requires clear-sightedness. Vision is also vital to enable leaders to glimpse the opportunities that lie ahead and rigorously pursue them, rather than succumbing to the paralysis of burnout. Values are

needed to create trust and underpin any action taken. But the values of true leadership must go deeper than short-term shareholder profit or the next election poll; only then will there be a real connection and meaningful interaction, between the people and their leaders. In today's world, both power and information are widely dispersed, and, therefore, decisions can only be implemented if people understand the rationale behind them. Vision provides the long-term reason and values provide direction and purpose.

It is telling that, despite the dire economic outlook, we have reached record participation numbers for our 2012 annual meeting in Davos. This demonstrates the fact that leaders feel the need to come together in order to collectively and collaboratively address the daunting global challenges that lie ahead of us. Davos provides a real opportunity for leaders from business, government and civil society to hone a collective vision and build collaborative values.

This annual meeting, in particular, will be important if we are to replace our current radar system of short- term, situational crisis management, with a compass providing clear direction and guidance based on long-term values. The main topic on the top of everyone's minds in Davos will inevitably be the rebalancing and deleveraging that is reshaping the global economy. But let us not forget that the purpose of the annual meeting is also to ensure that leaders exercise their responsibilities with moral integrity, and that the entrepreneurial spirit is harnessed for the public interest. The theme of this year's annual meeting is The Great Transformation: Shaping New Models, precisely because we are in an era of profound change that urgently requires new ways of thinking instead of just more business-as-usual. Leadership based on vision and values will go a long way to regaining trust and beating the burnout, but only if leaders themselves can prove through concrete actions that social responsibility and moral obligations are not just empty words.

Ghost Protocol; 4.2 FINANCIAL PLANNERS Value unlocking for all stakeholders: Davos-Klosters, Switzerland 25-29 January The Great Transformation: Shaping New Models

The contextual change at the top of minds remains the rebalancing and deleveraging that is reshaping the global economy. In the near term, this transformation is seen in the context of how developed countries will deleverage without falling back into recession and how emerging countries will curb inflation and avoid future economic bubbles. In the long term, both will play out as the

population of our interdependent world not only passes 7 billion but is also interconnected through information technology on a historic scale. The net result will be transformational changes in social values, resource needs and technological advances as never before. In either context, the necessary conceptual models do not exist from which to develop a systemic understanding of the great transformations taking place now and in the future. It is hubris to frame this transition as a global “management” problem of integrating people, systems and technologies. It is an indisputable leadership challenge that ultimately requires new models, bold ideas and personal courage to ensure that this century improves the human condition rather than capping its potential. Thus, the Annual Meeting 2012 will convene under the theme, The Great Transformation: Shaping New Models, whereby leaders return to their core purpose of defining what the future should look like, aligning stakeholders around that vision and inspiring their institutions to realize that vision.

Some introductory ideas by Professor Klaus Schwab on the theme of the Annual Meeting 2012 Over the last three years, the world has been engulfed by political, economic and, particularly, financial crisis management. We have lost sight of the fundamental transformation that the world is undergoing and of where

conventional modes of decision-making have become outdated. What we clearly need are new models for global, regional, national and business decision-making which truly reflect that the context for decision-making has been altered – in unprecedented ways. Let me outline the four new models I consider “musts” if we are to successfully push beyond the current impasse in addressing the critical challenges.

First, a new model is needed to account for the fundamental power shifts that have already and are continuing to take place. I am thinking not only of the seismic shifts of geopolitical and geo-economic power from West to East and from North to South, but also of the need to integrate new non-state actors who want to have their say and the capability to do so. Power has become much more

Ghost Protocol; distributed. Thus, we need new models where governance processes on all levels integrate these newcomers in the most collaborative way. In the old world, it was hard power –hierarchical power – that was decisive; then came soft power – the capability to have a convincing message. But today, we need to integrate empowered newcomers in what I call “collaborative power” – the capability to exercise collaborative power will determine the future on the business, national, regional and global levels.

A second new model is needed to acknowledge that we live together in a multicultural, multi-ethnic and multi-religious world. Prevailing values will have to increasingly accommodate diversity with substantial challenges for national and individual identities. We will only make lasting progress by recognizing that we are different but interdependent. Thus, we have to cultivate a much greater feeling of regional and global togetherness.

A third new model is needed to seriously address the social impact of globalization and the new wave of technological innovation. Growing inequities within and between countries and rising unemployment are no longer sustainable and are triggering social protests, as witnessed throughout the world. We must rethink our traditional notions of economic growth and global competitiveness, not only by focusing on growth rates and market penetration, but also, equally – if not more importantly – by assessing the quality of economic growth. How is growth to be achieved in the future? How sustainable is it and at what cost to the environment? How are the gains distributed? What has become of the family and community fabric, as well as of our culture and heritage? The time has come to embrace a much more holistic, inclusive and qualitative approach to economic development, based on the “stakeholder” and not on a pure “shareholder” concept.

We need a fourth new model for job creation. The global economy is growing more slowly, productivity is still making substantial progress and unemployment is skyrocketing. We also know that hundreds of millions of people will enter the job market in the next decade. In addition to the productivity increases driven by greater resource efficiency, the industry model is changing and moving upscale, where fewer people can produce much more value. The key to mitigating a catastrophic situation is to provide young people with the capability to create their own jobs: to move from the pure concept of unemployment

to the concept of micro-entrepreneurship. This will require fundamental changes in educational systems, nurturing a societal spirit of entrepreneurial risk-taking, allowing true gender equality – to integrate the other half of hidden talents – and making innovation and the support of innovation a key imperative in public and private life. The success of any national and business model for competitiveness in the future will be less based on capital and much more based on talent. I define this transition as moving from capitalism to “talentism”. I have outlined only four of the new models that form part of the great transformation regionally and globally to illustrate that we are at a historic inflection point. In Davos, we will discuss many more aspects of the great transformation, particularly how they create new business models. Davos is the place where we must – individually and collectively – have the foresight, the commitment and collaborative power to shape the new models needed to safeguard our global future, and to respond to the expectations and hopes of the hundreds of millions of people who presently feel left out.

Ghost Protocol; 4.3 RISK MANAGEMENT CONSULTANTS Educate –and Engineer Enforce Taking Back Globalization

The World Economic Forum’s annual gathering is normally little more than a toast to the benefits of increasing global GDP, trade, and investment. But this year’s meeting comes at a time when economic expansion can no longer be taken for granted, and when the uneven benefits of past growth are sparking mass social unrest. So it is little wonder that doomsday scenarios about the “seeds of dystopia” and the risks of “rolling back the globalization process” are being dangled in Davos. The

world’s economic and political leaders stand warned: do globalization better, or it will be derailed by the growing legions of the discontented. Leaders would be unwise to ignore this warning. Discussions in Davos must go beyond how to rectify the imbalances in developed countries’ debt-to-GDP ratios. They must finally pay attention to the wider imbalances generated by unfettered globalization. These imbalances are more evident in the global food system. Globalization has been wholeheartedly embraced in the service of feeding the world: bilateral and multilateral trade agreements have been put in place to allow food to flow from food-surplus to food-deficit regions. Yet this model has failed spectacularly. The food bills of the Least Developed Countries (LDCs) increased five- or six-fold between 1992 and 2008. Imports now account for around 25% of their current food consumption. The more they are told to rely on trade, the less they invest in domestic agriculture. And the less they support their own farmers, the more they have to rely on trade. Countries that fall into this vicious cycle leave their citizens vulnerable to historically volatile prices on international markets, which mean increased hunger and insecurity. Despite the persistent challenges of hunger and food inequality, people are told to embrace more open markets, more trade, and more globalized economic processes. Yet open markets do not function as perfectly as many at Davos would like to think. Food moves where purchasing power is highest, not where the need for it is most urgent. Trade and investment agreements are the gateways through which globalization passes on its way to redefining a country’s economic landscape, and they are increasing at an impressive pace. There are 6,092 bilateral investment agreements currently in force, with 56 concluded in 2010 alone. That growth reflects the flawed economic model of the pre-crisis years, which relied on indifference to where growth came from, how sustainable it was, and who was benefiting from it. If we are to learn anything from the ongoing crisis, it must be to start asking the right questions. Every new bilateral agreement, every chapter of globalization, should be measured against new criteria. How sustainable and how evenly spread will the macroeconomic benefits be? Will they facilitate genuine development and provide dignified opportunities to those who become economically displaced? Globalization must be taken back for the interests of the many.

Ghost Protocol; High Food Prices: A Blessing in Disguise?

High food prices may turn out to be a blessing in disguise for African farmers, said the head of the United Nations' World Food Program. "You can look at hunger as a Malthusian nightmare, or you can look it as a tremendous opportunity because everyone has to eat," said WFP Executive Director Josette Sheeran, referring to a theory that once population growth exceeds

agricultural production, people will be forced to return to subsistence-level conditions. "If you solve hunger, you create jobs up the entire hunger chain. The world can't feed itself in 2050 without the African farmer having its time in the sun, so I believe the time has come for the African farmer," she said. The world's agricultural growth potential is in Africa, where yields are a tenth of what they could be with proper investment and conditions, Ms. Sheeran said. "In the meantime, it's going to take some real global coordination to ensure you don't have nations who are so vulnerable to the price swings that are happening," she said. Describing the soaring prices of 2008-2009 as the "perfect storm," Ms. Sheeran says food security was a wakeup call for world leaders. "We're in much better shape today as far as managing those shocks for the most vulnerable nations, and other nations that have the capacity have put in place mechanisms to ensure they can manage this. Global food reserves are replenished," she says. "If you don't have food, you have three choices—you can revolt, you can migrate or you can die. It's very important that world has a backup plan for those three things."

Ghost Protocol; 4.4 CREDIT COUNSELORS Resolve convertibility and recompensation issue: Leaders slam eurozone 'foot-dragging' on debt

Saturday January 28, 2012 DAVOS – The eurozone's debt burden hung heavily over Davos on Saturday as global economic leaders turned their fire on EU politicians for failing to come to grips with the crisis. At the forefront of concerns were write-down talks in Greece, which had dragged into the weekend and now threaten to overshadow an EU summit on Monday designed to showcase the continent's plans to escape the debt trap.

But senior officials from outside the eurozone also argued Europe has not got on top of the long-term problems undermining the single currency, and needs to move further and faster in integrating eurozone economies. "The fact that we're still, at the start of 2012, talking about Greece again is a sign that this problem has not been dealt with," British finance minister George Osborne told a public panel of senior finance officials. "The danger here is that the tail wags the dog throughout this crisis, in other words the inability to deal with the specific problems in the periphery causes shockwaves across the whole European economy and the world economy."

Canada's central bank chief Mark Carney, who chairs the international bank regulator the Financial Stability Board, said Europe's woes were holding back the recovery and had effectively cut global growth by one per cent. European and eurozone officials at the World Economic Forum, an annual get-together of the great and the good in global business and politics, have spent the weeks attempting to drum up optimism on the debt talks.

But as the five-day talking shop drew to an end, Greek leaders were still locked in talks with private lenders over the details of a plan to wipe 100 billion euros from their sovereign debt - and thus avoid a messy default. And another dispute was looming, as European officials said that Germany was pushing for the European Commission to take control of the Greek budget, and Athens sources hit back angrily, dubbing this "out of the question." The drawn-out talks have undermined attempts to contain the crisis and shore up bigger eurozone economies, to the frustration of leaders from the emerging economies and the rest of the developed world. "You need decisive action. You need overkill. Confidence must come from decisive actions from governments," declared Donald Tsang, chief executive of Hong Kong's autonomous regional administration.

Ghost Protocol; "Two months ago in Greece you could make do with a 20 per cent haircut, now even 50 per cent is not easy. Maybe 70 per cent is needed, so do it quickly. You need resolution and decisiveness." A Greek finance ministry official reported "great progress concerning technical and legal matters" but said there "is still a lot of work left to do," leaving it open as to whether there would be a deal this week.

World Bank chief Robert Zoellick praised the European Central Bank for increasing liquidity for eurozone banks to enable them to buy more sovereign debt, but warned that this could only be a stop-gap measure. "I'm glad the ECB took action. But this buys time, you still have to act," he said, as the world waits to see if Monday's summit will produce agreement on a new "fiscal compact" setting in stone the bloc's deficit-cutting strategy.

"No one is immune in the current situation. It's not just a eurozone crisis it's a crisis that could have collateral, spillover effects in the rest of the world," IMF director Christine Lagarde warned delegates. "Now is the time. There has been a lot of pressure building in order to see a solution come about," she said, urging International Monetary

Fund members to give her the 500 billion dollars she needs to stock as a bail-out fund. "And it's for that reason that I'm here, with my little bag, to collect a bit of money,"

she said, to laughter and applause. Osborne, a eurosceptic who is glad that Britain stayed out of the euro, nevertheless said he hoped that Europe would overcome its woes. But, in an implicit rebuke for a reluctant Germany, he said this

would have to mean “permanent fiscal transfers" between stronger and weaker member states.

"That's what is required to make a single currency work," he said, arguing that Europe will either have to make the ECB its lender of last resort, pool its debt through joint eurobonds or through direct budget transfers. The eurozone's woes were again underlined when credit rating agency Fitch cut the ratings of five of its members including Italy and Spain,

citing their poor finances and vulnerability to sharp turns in market sentiment. The Davos forum ends on Sunday, at which point the financial world's eyes will switch to Brussels and the much anticipated EU summit.

Ghost Protocol; 4.5 ISSUES OF THE PRESENT Freedom to get & fail in the system of free enterprise:

Fallout from the crisis could last the rest of this decade DAVOS, Switzerland — Economist Nouriel Roubini, nicknamed "Dr. Doom" for his gloomy predictions in the run-up to the financial meltdown four years ago, says the fallout from that crisis could last the rest of this decade. Roubini, widely acknowledged to have predicted the crash of 2008, sees tough times ahead for the global economy and is warning that without major policy changes things can still get much worse. Until Europe radically reforms itself and the U.S. gets serious about its own debt mountain, Roubini said, the world economy will continue to stumble along to the

detriment of large chunks of the world's population who will continue to see their living standards under pressure, even if they have a job. Economist who foresaw '08 crash warns conflict with Iran could cause global recession: He also warned that a conflict with Iran over its controversial nuclear program could lead to a global recession. He said the biggest uncertainty is the possibility of a conflict with Iran over its nuclear program that involves Israel, the United States, or both. That could lead oil prices now hovering around $100 a barrel to spike to $150 per barrel, and lead to a global recession. We're looking at little growth in half the world: Looking at economic prospects this year, he agreed with the International Monetary Fund's latest forecast that the global economy is weakening and

said he might be "even slightly more bearish" on its prediction of 3.3 percent growth in 2012. He painted a grim picture of the eurozone in recession and key emerging markets in China, India, Brazil and South Africa slowing down, partly related to weakness in the eurozone. Roubini predicted that the U.S. economy, the world's largest, will grow by just 1.7-1.8 percent this year, with unemployment remaining high. The government, he added, was "kicking the can down the road" and not

taking measures to increase productivity and competitiveness. "We live in a world where there is still a huge amount of economic and financial fragility," he said. "There is a huge amount of uncertainty — macro, financial, fiscal, sovereign, banking, regulatory, taxation — and there is also geopolitical and political and policy uncertainty."

Ghost Protocol; "There are lots of sources of uncertainty from the eurozone, from the Middle East, from the fact that the U.S. is not tackling its own fiscal problem, from the fact that Chinese growth is unbalanced and unsustainable, relying too much on exports and fixed investments and high savings, and not enough on consumption. So it's a very delicate global economy," Roubini said. Unemployment and economic insecurity have become big issues from the Mideast to the Occupy Wall Street movement in the U.S., and protests from Israel and India to Chile and Russia — and at the same time there is rising inequality between rich and poor. "All these things lead to political and social instability," he said. "So we have to reduce inequality. We have to give growth to jobs, skills, education, and increase human capital so workers can compete." Roubini called for a major change in policy priorities: We have to shift our investment from things that are less productive like the financial sector and housing and real estate to things that are more productive like our people, our human capital, our structure, our technology, our innovation. Roubini said slow growth in advanced economies will likely lead to "a U-shaped recovery rather than a typical V," and it may last for another three to five years because of high debt. "Once you have too much debt in the public and private sector, the painful process could last up to a decade, where economic growth remains weak and anemic and sub-par until we have cleaned up the balance sheet and invested in the things that make us more productive for the future," he said.

Ghost Protocol;

At World Economic Forum, Fear of Global Contagion Dominates DAVOS, Switzerland -- They came, they feasted on smoked sturgeon and black truffle risotto, drank liquor paid for by global banks, endured dozens of security checks, and tried not to fall down in the snow. They talked about the perilous state of the global economy and the future of capitalism. Then, they headed back to their home countries -- many in chauffeured limousines, some by private jet.

But as the people who run much of the planet wrapped up the annual festival of influence known as the World Economic Forum on Saturday, any sense of achievement was hard to discern. The participants arrived amid elevated unemployment in many economies, worries about government budget deficits, and fears that contagion from a financial crisis in Europe could infect the rest of the world. They went home with all of these worries intact, and perhaps reinforced.

Nouriel Roubini, the economist who is known as "Doctor Doom," noted that world leaders are divided on a great array of crucial issues, from arguments over trade imbalances and currency valuations to the threats posed by Iran and North Korea and the challenge of climate change.

"On all these issues that require international coordination, there is no agreement," he said during a Saturday morning panel. "It's a world of chaos that can lead to potential conflicts."

European officials confronted a palpable sense of impatience and resentment from their counterparts, drawing accusations that they have imperiled the fate of the globe by repeatedly failing to prop up ailing member states.

In private conversations here this week, senior officials from the US, Europe and Asia expressed a mixture of resignation and alarm that Greece may yet default on its government debts, despite several efforts by eurozone members to cobble together a credible rescue. Some warned that such an outcome could spook investors into pulling funds out of larger economies such as Italy and Spain, raising the prospect of defaults in those countries. A few suggested this could eventually trigger the breakup of the eurozone and the end of its shared currency, an event that could produce panic rivaling that seen after the investment banking giant Lehman Brothers collapsed more than three years ago.

Ghost Protocol;

In a riveting address here on Saturday, Hong Kong leader Donald Tsang recalled his place at the epicenter of the Asian financial crisis in the late 1990s, and the experience of the 2008 global credit pullback, asserting that the current situation is worse.

"I've never been as scared as now about the world, what is happening in Europe," he said.

Hong Kong faces little direct exposure to potential defaults on European government bonds, Tsang added, but the global financial system is now so interconnected that this confers no protection. He wondered aloud about the health of financial institutions that trade with Hong Kong's banks and the potential for trouble rippling out from the eurozone.

We do not know how deep this hole will be when the whole thing implodes on us. Nobody is immune.

Tsang merely voiced publicly the same perspectives expressed privately in recent days by his counterparts on multiple continents. He urged European leaders to demonstrate a sense of responsibility as global citizens, accusing them of putting the world's economy at risk by failing marshal a plausibly large rescue fund. He contrasts this with Hong Kong's own brush with crisis more than a decade ago.

"We were very much left to ourselves, and we overcame it," Tsang said. "In Europe now, you need decisive action, you need overkill. You need to inspire confidence. That confidence must come in the decisive action of government, working together. And do it quickly."

But conversations here this week only underscored the sense that Europe is politically incapable of acting in unison. Though the eurozone shares a common currency, it is comprised of 17 different countries with often-sharp differences over policy -- not to mention history, tradition, culture and language.

Many experts have called for the issuance of Euro bonds by the European Central Bank and backed by the credit of member countries as the most powerful way to demonstrate the community's resolve toward supporting troubled members. Germany has consistently opposed such proposals, unwilling to direct its prodigious savings at saving members it views as profligate -- not least, Greece.

"You spend money you don't have on the bills of others, and that's the wrong incentive in a functioning market economy," German finance minister Wolfgang Schaeuble said earlier in the week, shooting down a question about Euro bonds. "At the end, you have to pay your bills. If you spend at the risk of others, it's a strong temptation. Everyone will fail on this temptation. That would be the wrong method in fighting the causes of the current crisis."

Ghost Protocol;

Among policymakers and investors alike, the sense has taken hold that pair of European rescue funds -- collectively holding perhaps $1 trillion in lending capacity -- is insufficient to assuage the market's fears. Bailing out Spain and Italy could absorb four times that sum, according to Roubini.

Many European officials are hoping to receive an expanded assist from the International Monetary Fund, a once unthinkable prospect for an institution traditionally employed to support developing countries facing crises.

The fund's managing director, Christine Lagarde, has been seeking to drum up a fresh $500 billion to attack the crisis, using Davos as an elaborate fundraising platform.

"The IMF is a tool, but we need to have a toolkit," Lagarde told forum participants Saturday morning, later holding up her purse as a prop. "I'm here with my little bag to actually collect a bit of money."

But that request has received a cool reception from major fund shareholders. The United States, the IMF's largest contributor, has signaled unwillingness to allow more fund finances to flow to Europe until the eurozone deploys its own resources toward an aggressive rescue. Japan's economic policy minister Matohisa Furukawa echoed that position on Saturday.

"Speaking of the role of the IMF, I think that the most important thing is Europe itself make utmost efforts," he said. "Then, IMF can support the European countries."

Underlying the debate over whether and how Europe can erect an effective firewall are deeper doubts about the continent's ability to grow. As many states address budget deficits, they are cutting spending and pressuring labor to accept lower wages -- measures that sap their economies of spending power. Slow growth itself tightens financial straits by reducing government revenues, prompting investors to take their money elsewhere, which raises borrowing costs.

"The eurozone is going to be in recession this year," said Robert Shiller, the Yale economist who warned of both the technology and housing bubbles in the United States. "The U.S. may not. The world may not. It's not going to be a great year, though."

Ghost Protocol; The one source of cheerier conversation here this week has been the relatively strong growth in so-called emerging markets, such as China, India, Brazil and Turkey. But these economies have been slowing in recent months. Now, concerns about Europe's problems are amplifying concerns.

A weak Europe translates into fewer orders for goods from developing countries. As European banks seek to bolster their balance sheets, they are pulling funds out of developing economies and bringing them home -- a trend that could prevent even healthy firms in fast-growing markets from getting their hands on cash needed to expand and hire, further crimping growth.

"You're going to see a credit contraction as the banks pull back," World Bank President Robert Zoellick warned.

All of which means that as the masters of finance and heads of government filter out of this ski resort in the Swiss Alps, the anxiety gnawing at the global economy continues unchecked. The damage could run beyond an economic slowdown, further undermining public faith in the institutions that now govern modern life.

For decades, as crises have assailed developing countries from Indonesia to Argentina, the powers-that-be in the United States and Europe have counseled orthodox advice: Get your fiscal house in order; live within your means; act decisively and resolutely. Yet now that crisis is hitting the wealthy world, leaders are avoiding the hardest decisions and hoping to muddle through -- all while exporting their afflictions to multiple shores.

"This has got to have effects on influence, perceptions of power in the world that are going to be quite significant for years to come," Zoellick said. "Whatever we see come out over the course of this year and the next year, the world is never going to go back to the way it was."

Ghost Protocol; 5. CENTRAL BANKS

European Banking Authority {EBA) Stress Tests

We are all Europeans now! The continent's nations and their banks, joined in a dance of death, are the known unknown of the global economy. As European leaders grapple with the problem of debt, the European Banking Authority (EBA) updated its stress tests, increasing the amount of capital that European banks need at 115 billion euros. The capital is necessary to cover a fall in the value of sovereign bonds held by the banks and improve their ability to survive the debt crisis.

The data used was dated and further deterioration of the value of sovereign bonds has already occurred. The tests ignore second order effects. The austerity packages being implemented, as European nations try to bring their public finances under control, will trigger an economic slowdown with increases in bad debts. More capital - as much as 300-500 billion euros- will be needed. With share prices down significantly (40-60% in 2011) and weak profits driven by write-offs and lack of balance sheet growth, European banks face difficulties in raising capital. Unlike US banks in 2008-09, European banks are reluctant to cut dividends. They argue the need to preserve their brand, compensate investors for poor share price performance and a return to profitability. The EBA has not intervened to force a suspension of dividends to husband capital. European banks are important in the global flow of credit. European banking system assets are around $41 trillion, over 250% of the US banking system. Credit Agricole, the third-largest French bank, is planning to reduce assets by around 15-18 billion euros by the end of 2011 and by 60 billion euros by end 2013. This will improve the bank's capital position and also reduce its funding needs by 50 billion euros.

If, as seems likely, other banks undertake similar actions, selling foreign assets and shutting (mainly overseas) operations, then the effect on the broader economy will be significant. In 2007, European and US banks accounted for 30% and 10% of loan in the Asia-Pacific region. This has fallen by around half to 15-16% for European banks and 5-6% for US banks. The level of participation is likely to shrink further. Troubled French banks

account for about 11% of 2012 maturing loans in the Asia-Pacific. It is unlikely that these banks will maintain their level of commitment. Withdrawal from foreign markets is already having a noticeable impact in Eastern Europe and Asia in terms of cost and availability of funding. The ability of companies to finance trade and investment projects has been affected. Sectors like aircraft financing, where European banks have historically been active, will be hit. Asia-Pacific banks have taken up the slack, but are not sizeable enough to fill the gap completely. In addition, tighter bank capital and liquidity rules being implemented by regulators limit the capacity of banks to expand credit significantly.

Ghost Protocol; The problems will increase as European sovereigns and banks need to find 1.9 trillion euros to refinance maturing debt in 2012. European banks need 500 billion euros in the first half of 2012 and 275 billion euros in the second half. They need to raise 230 billion euros per quarter in 2012 compared to 132 billion euros per quarter in 2011. Since June 2011, European banks have been only able to raise 17 billion euros compared to 120 billion euros for the same period in 2010. The funding problem of European banks will be compounded by the need of sovereigns to raise funds. Investors have been steadily reducing their exposures to European countries. The bailout fund and the IMF with around 200-250 billion euros each cannot absorb the issuance. This means that European banks will be coerced to buy government bonds, which are then pledged as collateral to borrow unlimited funds from the European Central Banks or national central banks. The ECB has reduced Euro interest rates and lengthened the term of emergency funding of banks to three years with easier collateral rules. This perpetuates the circular flow of funds with governments supporting banks that are in turn supposed to bail out the government. Weaker Eurozone countries may meet their debt requirements through these measures, but it will merely worsen the problems of the banking sector. The tighter credit conditions come at a difficult time for India, which runs both budget and trade deficits. Its infrastructure investment programme, viewed as a crucial driver of growth, requires foreign financing. Indian companies also face challenging refinancing schedule. Foreign currency debt that matures within the next 12 months or so is now around 40-50% of India's $314 billion of currency reserves. European banking problems will also be a key channel by which the continent's debt problems will be transmitted to countries like India. Certainly, we are all Europeans now!

Ghost Protocol; 6. INFLATION

Tackle It Effectively First we were in denial about inflation: the supply-shock explanation fell flat with very good production numbers in FY2011, likely to be replicated this year. The excuse that the poor were less poor and eating more was used to show that inflation was due to prosperity, with the MGNREGA being the motivator. While this factor could be at play at the margin, it has not been decisive and is no longer harped on. The RBI is firing away at inflation with a relentless policy of rate hikes, which has not worked quite the way it was expected to. But we need to know how this inflation has come to tackle it appropriately. The answer seems to be a shrug. One way to tackle this issue is to actually analyse threadbare the mechanics of inflation. This is so because inflation combat has to be a joint action from various ends and cannot be the sole responsibility of one agency, which today is the RBI. The accompanying table provides the contribution of various products to inflation along with the ministry or agency responsible. To calculate the contribution of various sectors to inflation, the weighted change in the overall WPI and individual products has been calculated. Various products have then been grouped under different ministries that oversee their operations. The major cause of price increase has been noted so that the respective body can address price issue.

There are multiple factors that have contributed to inflation. The highest share has come from the so-called core sector: non-food, non-fuel manufactured products over which the RBI has control. Globally, prices of metals have started declining, but we have not seen that in India. So, around 40% of inflation may be attributed to possible demand-pull pressures. While global prices have come down, the rupee has depreciated, nullifying those gains. We can see that there are various arms of the government that should take some responsibility for inflation. First, the agriculture ministry has to review its policy of minimum support prices (MSP). The MSPs have been increased relentlessly by the Commission on Agricultural Costs and Prices (CACP) to reward farmers. While production has increased for cereals and to a certain extent in pulses, it has had the tendency to

increase benchmark prices in the market resulting in higher inflation. Second, the ministries of petroleum and finance have tried to align the prices of petroleum products to the market, which actually makes us work on a delicate three-dimensional trade-off: higher prices, fiscal deficit and health of oil marketing companies. Around 11% of inflation has resulted from this factor. Third, the ministry of consumer affairs has to address the issue of warehousing and the Warehouse Development and Regulatory Authority should put in a structure to improve storage to cut down on

Ghost Protocol; wastage in fruit and vegetables. Around 40% of our horticulture output goes waste due to absence of cold storages. In this segment, we have witnessed high growth and where supply outstrips demand provided we can harness it through lower wastage. These organs need to make the system more efficient. While the contribution to inflation was negative in December, it was as high as 8.18% in October, prior to the decline in prices. Fourth, the area of milk, dairy products, eggs, meat and so on comes under the department of animal husbandry. Higher cost of animal feed and fodder has hiked the cost of production of these products. The significant aspect of these prices is that they are never mean-reverting, which happens for horticulture and cereal products. Fifth, the higher prices of textile products have to be looked at jointly by the finance ministry which hiked taxes on readymade garments and the ministry of agriculture, which oversees the MSP. Sixth, there is the global factor in the form of oil prices that directly impacts the prices of domestic crude as well as non-regulated oil products. Global prices translate into domestic ones through the exchange rate mechanism. The RBI could have a role to play in stabilising exchange rates to smoothen price volatility. The inflation matrix is, hence, quite complex and there is evidently no singular solution. And the conundrum really is that as every constituent is impacted by inflation - as the producer of a product consumes other products whose prices are increasing, there is an inherent motivation to increase one's own price to maintain the standard of living. This inflationary spiral, or rather the vicious circle, needs to be broken, and it appears that it can happen only in the medium run. Roughly 70% of inflation can be addressed by various departments while the balance, which includes global influences, would still be beyond anyone's purview. What is most important is that all these departments should start talking to one another.

Ghost Protocol; 7. KNOWLEDGE RESOURCE

India’s Anti-Corruption Contest

India ended 2011 amid political chaos, as the much-awaited “Lokpal Bill,” aimed at creating a strong, independent anti-corruption agency, collapsed amid a welter of recrimination in the parliament’s upper house, after having passed the lower house. The episode, which leaves the bill in suspended animation until its possible revival at the next session, raises fundamental issues for Indian politics which will need to be addressed in the New Year.

The need for the bill – Lokpal loosely translates as “ombudsman” – was first mooted in 1968, but eight subsequent attempts to create one had never reached a parliamentary vote. The credit for imparting urgency to an issue that had become a hardy perennial of Indian politics goes to the mass campaign that coalesced around a Gandhian leader, Anna Hazare, who insisted that a “Jan Lokpal Bill” (“People’s Ombudsman”) drafted by his followers had to be enacted in toto. Two well-publicized fasts by Hazare, attended by hundreds of thousands and breathlessly covered by India’s news channels, pushed the government to expedite preparation and consideration of a bill. The draft differed in many respects from Hazare’s, but it retained what most people sought – an independent agency with its own investigative resources and prosecutorial powers. After parliamentarians were summoned back to work after Christmas in an unprecedented extended winter session, the bill passed the Lok Sabha (the lower house), where the ruling coalition commands a narrow majority. But the government’s attempts to entrench the law in a constitutional amendment, thereby elevating the authority of the office, failed to command the necessary two-thirds support. Still, the bill’s passage after 43 years of stalemate was little short of historic. The action then shifted to the Rajya Sabha (the upper house), where the government lacks a majority. After a session lasting until midnight, punctuated by the introduction of 187 amendments (most by the opposition but some by coalition allies of the ruling Congress Party), the government pleaded incapable of processing all the amendments in time. Agitated members shouted their dissatisfaction (one rather melodramatically tearing up the draft bill), and the Rajya Sabha’s chairman, Indian Vice-President Hamid Ansari, halted the proceedings without a vote. All sides have flung accusations at each other. Some allege that the government’s bill, by requiring a similar ombudsman in each of India’s states, was an assault on Indian federalism. Others claim that the government colluded in the disruptions in the Rajya Sabha, because it knew that it could not win the vote; some, preposterously, suggest that the government did not want the bill to pass; still others claim that it would have created such a “weak” Lokpal that it was not worth passing. The government has grimly suggested that it would go back to the drawing board with a view to reviving the bill during the parliament’s budget session, due in March. Whatever happens, the need to tackle corruption is undeniable. In a recent survey by the anti-corruption watchdog group Transparency International, 54% of Indian respondents said that they had paid bribes in the last two years, in interactions with police, bureaucrats, and even educational institutions.

Ghost Protocol; While the media have tended to focus on big-ticket corruption, such as that revealed by ongoing scandals concerning on the allocation of spectrum to telecom companies or the organization of the Commonwealth Games, petty corruption has often affected people more directly. The mass outpouring of support for the quirky Hazare reflected the genuine frustration that most Indians feel over the corruption that assails their daily lives, rather than a clear understanding of Hazare’s proposals to combat it. Every time a poor pregnant woman must bribe an orderly to get a hospital bed (to which she is entitled), or else deliver her baby on the floor; every time a widow cannot get the pension that should be hers by right, without bribing a clerk to process the papers; and every time a son cannot obtain his father’s death certificate without greasing the palm of a petty municipal official, Indians know that the system has failed them. They are right to vent their anger at endemic graft. Indeed, corruption in India is far broader and deeper than the headlines suggest. The Lokpal will not be a panacea. It is one instrument among many that are needed, along with reforms to increase transparency, protect whistleblowers, prevent tax evasion, clean up campaign financing, and reduce officials’ discretionary power, which allows them to profit from the power to permit. Inspectors and prosecutors can catch only some criminals; India needs to change the system so that fewer crimes are committed. Corruption isn’t only high-level governmental malfeasance; overcoming it requires nothing short of a change in Indians’ mindset. For every Indian bribe-taker, there is a bribe-giver looking for a shortcut or an undue advantage. To paraphrase Mahatma Gandhi, we need to be the change that we wish to see in India. Corruption will not end until Indians stop giving bribes as well as stop taking them.

Freedom from Economics

This is the time of the year when we all wallow in an orgy of reflections, predictions and forecasts. The year 2012 is giving all the usual crystal-ball gazers immense trouble; not only have the Mayans predicted the world is going to end

in 2012, confusing the issue, nobody seems to want to stick their necks out for what promises to be an impossible year. But, well begun is half done; 2012 could be said to have not just begun well but on a perfect chronological note. Since the year began on the weekly holiday of a Sunday, people all over the world could celebrate New Year's Eve

without having to worry about getting up early to go to work the morning after.

Ghost Protocol;

THE WORLD’S MAJOR ECONOMIES SHARE MANY MORE VULNERABILITIES THAN IS COMMONLY SUPPOSED

www.mi7safe.org

Alka Agarwal

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Financial Advisor Practice Journal – February 2012 Volume 68 … Ghost Protocol

Will US Economy Save The World Again? Co-Editor: Ankur Agrawal