#Fincabulary 14 – Bagel Land

Meaning – A slang term that represents a stock or other security that is approaching zero in price.

This term is typically used to describe an asset that has fallen from grace as opposed to a penny stock or other historically cheap security. If a stock or other asset is headed towards bagel land or is approaching zero, investors generally feel that the security is nearly worthless. In such cases, a company may be nearing bankruptcy or facing major solvency issues. While returning from bagel land is possible, the likelihood that equity investors will lose their entire stakes in the company becomes very high.

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

IMPACT OF BREXIT ON EU

Author: TANUJ GUPTA

Love gone bad! No I am not referring to any Bollywood couple’s breakup but Britain’s exit from the European Union (EU). On 23rd June 2016, the people of Britain voted for the most important decision of their life which will impact not only them but also the future generations of Great Britain and EU. BREXIT will surely transform the economic, political and social landscape of EU.

ECONOMIC – Official trade statistics show that EU is the destination for half of British exports. But Britain’s share of intra-EU exports and imports is only 10.1% and 6.0% respectively. This number is also inflated because goods exported by Britain out of Europe are transited through Rotterdam port in The Netherlands. This phenomenon is termed as ROTTERDAM EFFECT.

Britain’s Total Export to EU 402.3 Billion Euro Britain’s share in total intra – EU exports Britain’s share in total intra – EU imports
Britain’s Total Import to EU 344.2 Billion Euro 10.1% 6.0%

Foreign investments in EU might dry up as companies use Britain as gateway to Europe because of Zero–tariff environment and free movement of labour and capital. Britain with 28% has the highest foreign investment in EU.

EU will have to find a replacement for London which has long served as the financial nerve centre of EU. Many investment banks having headquarters in London will have to move out of London so as to serve the European market. Germany which imports 14% of financial services will be the biggest loser in EU because of increase in cost of financial services.

POLITICAL – For starters, EU would lose an influential member which would have helped them to crack trade deals and have a say in World politics and economics. There will certainly be a shift in the power of decision-making in EU. Germany and France will want the decision-making power to shift towards them which might create further political frictions.

SOCIAL – Another pressing issue is immigration. The free movement of labour might be restricted in Britain due to BREXIT. This will result in the surge of low-wage migrant labourers from Africa and Middle East to EU. This might add fuel to the existing anti-immigration movements in EU and may lead to further political differences amongst EU members.

SECURITY – With the growing threat of ISIS, security is a key issue for EU. Britain is home to world-class intelligence agencies like MI5 and MI6. BREXIT will put EU at the back foot in counter terrorism and intelligence operations. The plans for building a unified European army will also be hit.

The EU after BREXIT will be an impaired regional and a geopolitical union as compared to the current EU, which already punches far below its economic weight in regards with  the global and regional diplomatic and strategic matters.

Importance of U.S. consumption in the revival of the world economy

By- Nayan Saraf

Since the global financial crisis of 2007-08, there has been a constant debate as to which economy would be the growth engine of the world, considering the complete slowdown of U.S. and the Eurozone. More often than or not, China and many other developing economies such as India, Brazil, Russia and Indonesia have appeared as the best alternatives. But regardless of all the optimism surrounding China and these developing economies, these countries have not been able to improve their performance in the absence of growth in U.S.

It’s not only because of the size of U.S. GDP, but also because of the contribution of consumption factor by U.S., which in itself is responsible for the prosperity of many leading economies. The table given below would give a clearer picture of the world’s two leading economies i.e. U.S. and China and the factors contributing to their GDP.

  Y     = C   + I        + G      + X(EX-IM)
U.S.  ($17.9 Tn) 100% 68.9% 16.3% 17.6% (3.3%)
China ($11.3Tn) 100% 38.1% 43.4% 13.8% 4.7%

It is quite clear that U.S. economy is mainly driven by consumption, whereas China’s is driven by investments (if we consider I + G). Hence, if U.S. economy slows down, it means less consumption, which could result in lower import which in turn may lead to closing off businesses and higher unemployment in exporting countries.

Since the global financial crisis, international weight of U.S. import share has shrunk from 17% to 12%, which is an alarming situation for countries like China, Canada, Mexico, Japan, Germany, U.K., France etc., which run huge trade surplus with U.S. Since U.S. is the largest trading partner of China, accounting for almost 1/5th of its import with a value of over $440 billion, it is very clear that even Chinese economy is worse off without U.S. consumption.

This is the reason that the economies around the world are anxiously waiting for U.S. to recover. And the key factor of reviving U.S. economy has always been consumption, which stands at nearly 70% of its GDP. That is why there have been constant efforts from the government and the FED to increase the consumption by means of lower interest rates, easy mortgage terms, Quantitative easing and easy credit card debt, in order to get the consumer to spend more and get the economy moving again.

TAX TREATY: BOON OR BANE?

By- Phani Kumar Ch

On May 10th, India’s 30 years love affair with Mauritius, with respect to their tax treaty, has finally come to an end. Investments routed, from financial year 2017, through Mauritius would attract taxes. Earlier, Mauritius was considered a tax haven for investors investing in India through this route. This could explain why in many years Mauritius was the largest source of FDI for India.

The Double Taxation Avoidance Agreement (DTAA), which was signed between India and Mauritius in the year 1983, has been amended in such a way that in the initial two years, 2017-2019, investments would be taxed at a rate of 15 – 20 %, which is half of the domestic tax rate in India. The treaty has been amended because of significant round tripping, and in the backdrop of the recent leak of Panama Papers that has prompted Governments to reconsider their tax laws. In this context, round-tripping means that money goes overseas through various channels like Hawala and payments to shell companies, and comes back to India through Global depository receipts and Participatory notes. Analysts are of the view that the treaties with Singapore and Cyprus will also get amended in the same way.

Will the FDI flows into India be impacted? We don’t think so. There might be a short-term pressure but in the longer term, everything boils down to fundamentals. And right now, India is one of the fastest growing nations in the world. Eventually fund flows will be dependent on the economic strength of the nation. Hence, the tax treaty amendment is definitely a boon.