Being Better Citizens

This is something very close to my heart.

How can we Indians restore and build  up a fractured society and leave behind an endearing legacy for our future generations.

Yes we have a corrupt government but so do most countries around the world. Yet in most countries there is a sense of belonging to the place where one resides. Unfortunately this is not the case in India.

We strive to keep our kitchens and living room clean but would not blink an eye lid if our child throws garbage on the streets. At the same time complaining how dirty the streets are.

Community groups in most countries would gang up to clean neighborhood  parks,water bodies  and plant trees. They would sacrifice their weekends to restore old structure, paint the local library or clean up the already clean streets.In India Community groups (apartment society groups) are more inclined to get busy during festival dates to create noise pollution and go about ringing doorbells asking for donations.Why not also ask people to work together to clean up the local park and collect fund to renovate the Government school library next door?

I have nothing against enjoying festivities but the same time and money can used for the betterment of our society the fruits of which we all will savor in the future.

In the UK there is a concept of community gardening,local government provide plots to citizens to allow them to grow their own vegetable,flowers and fruits on government land.If we so want to ape the west why not we have our own version of a community garden within apartment complex’s most of us reside in?

We talk about racism being a western phenomenon yet we Indians blatantly abuse a North Indian residing in South India. Although I admit this is mostly in the case of autorickshaw drivers who are the scum of society ,a necessary evil so to speak.

There are many more things that we as Indians should be doing to protect our fragile society all ready under attack by politicians, bureacrats, corrupt police.But lets make a start on the issues which I have written about as above.

We owe this much to our great country and our future generation!

Investing for your retirement – Part 2

4. Prepare a budget built around your savings –

 This means when you build up a budget first put in the amount that you are going to save for your retirement and other investments and then put in your expenditures. Unfortunately we tend to do it the other way round. This also does not mean that if your net take home is Rs50,000 per month and you set aside Rs10,000 for retirement you are going to spend Rs40,000 on shopping !.No way! This means that after setting aside for your retirement funding you set aside money to buy your own house or car or for funding your child’s education or marriage and then with the available balance you can go out and do your shopping. In short start spending or planning to spend only after you have saved up for the month.

When you build up a budget ensure that you segregate investments for your child’s education, marriage, EMI’s for your house/car and retirement separately.

Do not touch your retirement savings to fund your EMI’s and dare I say your child’s education or marriage. This is a tough choice but remember that your child if required will be able to fund his own higher education with a loan and enjoy tax benefit on the education loan but no bank will provide you with a loan after your retirement.

5. Investing in the stock market –

Be careful when you invest in the stock market. Do not get swayed by the analyst appearing on television or articles in the newspapers. A decade ago Satyam was a darling of the stock markets, retail investors who had invested in Satyam saw their investments nearly wiped out when the Satyam fraud was unearthed. Always remember that those advocating allocation of your savings to the stock market may have their own hidden agenda. It is always better to do your own analysis of individual stocks before making an investment. Do not under any circumstance invest more than 5% of your net take home in stock market. If you are unable to make an analysis of stocks then it is better to invest in a Mutual fund. Even then keep tracking the stock prices or the Net Asset Value of the Mutual Fund on a regular basis. If you have made notional profits of 20% , book the profits and exit, a bird in hand is worth two in the bush!

6. Systematic Investment Plan – SIP

   Do your own Systematic Investment Planning – Investing in SIP does not mean that you need to do it only via Mutual Funds through your broker or dematerialized  account. You can set aside a certain sum of money each month and invest it in gold, PPF, VPF or even blue chip stocks .Ensure that your SIP is a long term investment and should be utilized for your retirement planning. However ensure that although the investment is long term in nature you need to track the market value of your investment regularly.

Watch out for global events apart from domestic policies which may impact the value of your investments.

7.Projecting your post retirement expenses

 This is probably the most difficult of them all.

Projecting your future expenses in an environment where you stop earning can be an interesting

experience. You should start with listing out your current expenses that you incur. Take out expenses that you are not likely to incur post retirement  such as rentals (assuming you own your own house to by the time you have retired),keep a separate line item for medical expenses which would balloon up post retirement. Other expenses would include food,clothinig,electricity,internet and mobile telecom expenses.

 Ensure that the expenses are inflation indexed which means you need to factor in inflation which is currently at 10% while projecting your retirement expenses. So something which costs you Rs 100 today might end up costing you Rs 700 after 20 years. Include one off items such as travel ,purchase of household and electronic equipment, spending  in your budgeting. Once again remember that planning

for your children’s education and marriage should be done separately.

This should not be difficult. Start noting down your current expenditure by month and factor in inflation.

Annualise the expenses and then add one of items that you incur once or twice a year. Ensure you keep a 10% buffer by adding 10% of the above computed annual projected expenses.

As stated in one of the previous points you should ensure that you have paid all your outstanding EMI’s by the time you retire. Now that you have a reasonable idea of your post retirement expenses expense you now need to look at your projected income to ensure that your budget balances.

Remember the steps that we had taken previously (saving up a portion of your salary,start saving now etc).Revisit the amount to set aside for your investment if you think that your amount is too small to meet your expenses post retirement.

Your modeling may not be accurate so ensure that you get a second and if necessary third opinion.

You can ask your spouse or your friend to look at your post retirement budgeting. They would not only want to genuinely help you out but also would have a fair idea of your spending habits, medium long term plans etc.

Revisit your plan and assumptions made regularly , at least once every 3 months. Change assumptions such as inflation rate, rate of returns on your investments etc. Ensure that you are prudent while making your assumption. If you end up assuming a very low rate of inflation you might end up saving much less than what you require post retirement.

8. Second line of Income –

Think about a second line of income which you can continue even after  retirement. The added benefit could be that it is something that you enjoy. Providing tuition or selling photographs or designing websites could not only add to your bank balance but would allow you to do

Something which you truly like. You can save up a portion that you earn from your second line of income for retirement purposes.

With this I conclude my blog pertaining to retirement planning.Hopefully it was informative as well as helpful for retirement planning. I will relook this important topic in the near future to include points that I might have overlooked this time around.

Please write back and provide your feedback.It is extremely valuable.

Looking ahead to the Apr’12 RBI Policy

Now that the February’2012 and January’2012 revised IIP numbers and the March’12 Inflation numbers are out the attention turns to the RBI policy on the 17^th of April. As per Government data inflation is still stubbornly high at 6.9%.Notably food inflation is still very high at around 9.9%. February IIP growth came in at 4.1%.The very high inflation numbers under normal circumstances would not have allowed Mr. Subbarao to decrease CRR or the reverse repo rates. But these are not normal times are they?

Before diving into the pros and cons of a bank rate cut let us take a look at the Current Account situation.

The Current Account deficit has worried the Finance Minister so much that he had to raise the customs duty on gold. The merits of such a move are debatable. On the other hand with the Indian Rupee currently trading at around 51.30 to the US dollar means imported crude (80% of India’s crude oil is imported) has become more expensive apart from the fact that crude has at an average traded at $120 to a barrel (Brent crude) consistently in 2012.A growing current account deficit and erosion of our foreign exchange reserves is a worrying factor. If you reduce the bank rate and if it has a negative impact on inflation – which it might well have it would mean that the value of the rupee goes down further, this would mean that the rupee depreciates further against the dollar making crude oil imports even more expensive. This would in turn drive up inflation.

The government has till now shied away from increasing the administered price of fuel, but will not be able to hold on any longer. Oil Marketing companies are bleeding. Raising fuel prices is a double edged sword. On one hand by reducing subsidies it will help the Government to tide over the fiscal mess it has got itself into on the other hand, however, raising prices by reducing the Government subsidy will lead to higher inflation. Petroleum products are the highest taxed goods in India. Yet some of the petroleum products are also subsidised. An anomaly which is difficult to explain. To put it simply the taxes go into the Government coffers while on the other hand a large part of the subsidies are borne by Listed Government Companies. The Government does compensate the oil marketing companies but not 100%.

A further depreciation in the rupee would make things even worse.

A weaker rupee will make exports cheaper but the rise in input cost by way of rise in fuel would ensure that margins for exporters remain under pressure.

Further depreciation of the rupee would also make debt servicing by the Indian Government and the corporate sector more expensive. As an example if the Government had borrowed $10 billion dollars when the exchange rate was Rs48 for 1 dollar it had effectively borrowed Rs 48,000 crores. Now the rupee being 51.30 to a dollar means that the government will have to effectively pay Rs 51,300 crores in rupee terms an increase of 3,300 crores in around 6 months…..

It is against this back drop that Mr. Subbarao has to make the decision whether or not to cut CRR or the repo rate.

In terms of pure economics it is difficult to see Mr. Subbarao cutting rates. He has my support if he decides to remain firm and firm he must remain.

Thanks to the incompetent finance minister our “khazana” is near empty.

Privatisation of PSU’s have gone nowhere. Depending on LIC to bail out failed FPO’s or IPO’s will not work for ever. Spectrum auction should be seen as a one off receipt, expected to rake in Rs40,000 crore in FY’13 he must use it to reduce Government Debt instead of financing Air India and HMT restructuring.

On last count it is estimated that the Government will borrow Rs3,70,000 crores from the market in the next six months.

This will crowd out the market of liquidity and raise the borrowing cost of companies. Unless there is concrete action on the ground by the Government to reduce the budget deficit and rein in inflation the RBI Governor should not budge. The RBI has so far resisted pressure from the market to cut rates materially. This is a wise decision. Inflation has not gone down, infact food inflation has  alarmingly gone up. Higher excise and service tax post budget would have a negative impact on inflation.This was done by the Finance Minister not the RBI. The RBI must not be held accountable for the follies of the Finance Minister.

 Inflation in India is more a supply side phenomenon than a demand side. This means that the supply of goods and services has stagnated rather than the demand for them have quantitatively increased. If you decrease the bank rate what it will do is make borrowing cheaper for companies. This will make them invest to increase production which will increase supply of goods and services and this in turn will lead to lowering of prices. So much for the text book knowledge. India’s inflation is driven by increase in food  and fuel prices and soon to be -  rise in excise and service taxes. Rise in food prices unfortunately has to do more with black marketing, hoarding ,archaic laws and inefficient supply chain rather than pure economics. Hence if we want to see an increase in the supply of veggies ,pulses, cereals ,fruits and protein to the market tinkering with the  bank rate will be of little use. What experts and commentators also miss out is that large Indian companies have huge cash and cash equivalent lying in their balance sheet, why would they then go in for market borrowings?

The moderate IIP numbers and the slowdown in the economy seems to be be attributed to the very high interest rates. Although interest rates do play a very important role in the growth of the economy, what is required now is heavy doses of sensible economic reforms.Bank rate’s by their own can not change the course of India’s slowing economy. Without pragmatic economic policies backed up by implementation it will be difficult to increase the economic growth rate and rein in inflation.

The tone of the RBI’s post policy notes clearly places the ball in the Government’s court to rein in inflation by reducing the budget deficit. At best tomorrow’s RBI policy will lead to a reduction in the repo rates by 25 bps.Let us see what is in store for us.

Deciphering the Feb’12 IIP numbers – Jan’12 IIP numbers revised down

As a shocking admission of the slowdown in the Indian economy the Jan’12   IIP numbers were revised down from …..hang on…. from a high 6.8% to 1.1%.The Finance Minister was quick to quote his “unacceptable” remark again. Remember that this is the same gentlemen who goes on stating the high inflation numbers as being “unacceptable” for the last one year. Apparently the blame is being laid on the doors of the Directorate of Sugar (yeah we even have a separate department for that) for incorrectly stating that the sugar production at 13.4 Million tonnes instead of the actual (for the time being) 5.9 Million Tonnes.

The poor guy seems to have lost his calculator on his way to office and had to depend on the abacus to do his calculations.

Let us look at the more respectable and “acceptable” Feb’12 IIP numbers which came in at 4.1%.Well at least till they are revised downwards in the subsequent months. Manufacturing grew at 4%, electricity at 8%,mining sector grew at a respectable 2.1%,Capital goods grew at 10% while consumer goods contracted at 0.3%.Lets try and decipher these numbers .The first assumption being that the numbers reported by the CSO (Central Statistical Organisation) is correct. That assumption being made let us looks at the capital goods growth numbers for starters. After months of negative growth the capital goods numbers have grown at 10%.This had to happen. Apart from growing from a lower base it is important to note that the Indian economy in spite of slowing down is still growing at around 6%, considering that our GDP is at around $1.8Trillion it means that we are adding around $108 Billion to our GDP this year. This means that aggregate demand for goods and services has grown and will continue to grow at a moderate rate in the near future. This in turn would mean higher production of capital goods which basically is required to produce consumption goods.

Electricity growth numbers are good. The Indian economy cannot grow at a sustained high rate unless there is quality supply of adequate electricity. In fact India is one of the few very big economies where the aggregate demand for goods and services will grow and the only limiting factor for GDP growth rate would be the lack of quality infrastructure. Growth in India would be constrained by supply rather than demand. This is in stark contrast to the developed world where the limiting factor to economic growth is net aggregate demand and not supply. The challenges ahead remain; electricity consumption would peak in the hot summer months when air conditioners are turned on and the harvesting and sowing season kicks in. Since electricity in India is still thermal based the mining sector “read” coal has to pick up to ensure uninterrupted of coal to the power producers. Controversial (FSA) agreement between the Government  owned monopoly Coal India and power producers must be ironed out as soon as possible. Signing of the FSA has already been delayed .The initial 31^st March deadline it has extended to mid April. Delay’s in getting environmental clearance, political issues and land acquisition issues has ensured that Coal India would be unable to meet the industrial requirement for coal. This would mean that India which has one of the largest proven reserves of coal would have to import coal from Australia and Indonesia. Cost of imported coal being higher (unlike in the pricing of Coal by Coal India the Government of India has no political influence on the pricing of imported coal) this would result in electricity cost going up. The resultant increase in the cost of production would lead to higher prices and higher inflation.

The contraction in consumer durable numbers should not raise any alarm bells ,yet. Unlike the US we are still not a consumption based economy. Individual house holds still have a high savings rate. This is good. We need to save to invest in our future ,our and our future generations. However, a prolonged drop in consumer durables  demand would lead to lower factory orders ( doubtful in India’s case) which would then lead to job losses and lower indirect tax revenues for the government. This could in a dooms day scenario send the economy into an unrecoverable tail spin. This as I mentioned remains doubtful. One the Indian economy is still underdeveloped which means that demand for basic consumer durable will remain as ownership/penetration remains low , second with our high savings rate individual house hold can divert a part of their savings to consumption and thirdly consumer demand is cyclical where after completing its lifecycle a product has to be replaced or replenished.

Also remember that capital goods are used to manufacture consumer goods and since capital goods have seen a health growth rate it would mean that producers of consumer goods have budgeted for an increase in consumer good consumption in the medium term while placing their orders for capital goods.

 Next week the spotlight switches over to the inflation number and the all important RBI meeting.

Let us see what Mr. Subbarao has in store for us.

Investing for your retirement - Part 1

Investing for your retirement

Building up your Nest Eggs -

Now that Finance Minister has spoken and the post budget speeches by all have been done away with, I turn my attention to more “serious” things to consider. Unlike other commentators I will not indulge in useless and unproductive bashing of the finance minister. For that you can tune into the television channels of your choice where “paid” speakers provide their valuable personal feedback on the budget.

I am trying to find out the ways and means by way I am able to save up and invest for my retirement apart from saving up for  my children’s education and their marriage. Building up your nest egg’s or in layman’s term your post retirement funds is extremely important. Unfortunately I rarely find any erudite person on paid television or in the newspaper guiding me to do so. So being a professional let me start by helping myself.

Let me look at it by jotting down a few points.

1.       Start saving now –

It is imperative for us to start saving now.

This has various advantages. Apart from the benefits of compounding it would mean that if we can spread our total investments over a longer period of time, the contribution in a given year would be a lot lower to attain a specific target than if the contribution was spread over a limited time frame. This coupled with compounded interest which is provided by EPF (Employee Provident Fund), PPF (Public Provident Fund) and even Bank FD’s (Fixed Deposit’s) ensure that we are able to save a lot more if we start to save a lot earlier.

As an example Rs 20,000 invested for 20 years in a PPF (PPF term can be rolled over for additional 5 years after the completion of 15 years) will fetch you around 10 lakh at the end of 20 years.

On  the other hand if you start late and can invest Rs20,000 for 15 years only at the end of 15 years you will get a return of around Rs 6 lakh.

Rate of return in both cases at 8.6%.(not adjusted for inflation and tax benefit).

This is the power of compounding.

2. Do not put all your eggs in one basket   -Diversify your investments.

As a salaried employee 24% of my basic salary is “forced” saved into a Provident Fund account. This would give me returns of 8.25% for the year 2011-12, certainly much lower than the rate of inflation in India even if you consider that contributions are tax exempted giving a real rate of return of around 10.7% (assuming we are in 30% tax bracket) .

As a individual you can also open up a PPF (Public Provident Fund) separate from EPF with either the State Bank of India or in the Post office. Interest in PPF is at around 8.6% and like EPF contributions are eligible for tax benefits. However, you need to note that although the rate of interest is stable they are no ways fixed. The Government in fact has reduced the rate of interest on EPF from 9.5% for the year 2010-11 to 8.25% for the year 2011-12.Till now payouts at the time of retirement from both EPF and PPF are exempted from tax. This might change with the advent of the DTC (Direct Tax Code) under the EET (Exempt Exempt Tax) model. In a PPF in the State Bank of India a person can invest a maximum of Rs70,000/-. While EPF is “forced” on salaried individual PPF is voluntary and open to all.

However, for the purpose of claiming deduction under section 80C both are clubbed to compute the maximum deductible amount of Rs 1 lakh ( NSC, Insurance, Principal portion of EMI ,fixed deposits are also eligible,).

Since both PPF and EPF provide similar rates of return it is important to look at other investment option as well.

Insurance Policies of late have become a favourite of investors because they offer insurance along with returns other than the fact that it can be claimed as a deduction under section 80C.

However, the rate of return on insurance is very low .Most Indians would look at investing in LIC ( which in turns look s to bail out the Government example being the ONGC FPO issue in mar’12 ) which gives a rate of return of around 6%.( I am referring to endowment policy and not ULIP’s)

ULIP’s or Unit Linked Insurance Policy are Insurance Policies’ where the money invested by the investor is invested into either the stock market or the debt market (depending on the choice of the investor) and offers insurance as well. I have never been a fan of ULIP’s if you want to invest in the stock markets or Mutual fund or the debt market then you can do it on your own by careful research and reading the financial statement and performance of the MF or the company. There is no need to pay exorbitant management fees to fund manager. The greater risk lies in the fact that today most people look at investing in ULIP’s as a way to invest in the stock markets. Those that had invested prior to the Lehman Brothers crisis have suffered, the resultant crash in the stock markets post the Lehman brothers crisis  have reduced the value of units considerably and offer returns lower than Bank FD’s. Those who had parked their lifelong savings in ULIP’s as a retirement option have had their fingers burned.

I would be looking at picking up a simple vanilla “term” policy. A term policy unlike endowment or money back policy is purely insurance policy with no returns. It is meant to cover for your life and not an investment option. Since I already have an endowment policy with life cover with LIC the next insurance policy would be a “term” one. Term policies also have much lower insurance premium than an endowment policy and the money saved can be invested in an instrument or asset class which gives me more than 6% of returns.

Invest a certain portion of your retirement portfolio in gold. It is important to note that when I talk about investing in gold I am talking about holding physical gold and not the paper or electronic form.

The rate of return of gold as stated in my previous topic is certainly at par if not much better than that offered by other savings instruments.

Saving towards buying an apartment of our own is both an investment as well as a sound retirement goal. Ensure that you do not have any EMI’s still pending when you retire. In fact you should have cleared off all your EMI’s whether related to property, car, your children’s education well before your retirement.

If you are lucky to be earning and saving enough to go in for a second apartment after calculating the amount required for your child’s education and marriage and setting aside money for an emergency fund ensure that the apartment is in a city where you want to live your retired life. It might not be in a city where you are currently working. A second property is a very good investment option. You can get a steady source of income by renting it out or after selling the property you can invest the sale proceeds in a fixed deposit earning fixed rate of returns.

3. Put aside a part of your net take home for retirement –

Start saving up now for your retirement. Set aside a portion of your net take home (salary less deductions like tax, contribution to provident fund etc) to build up your war chest for retirement. DO NOT TOUCH IT. Start with an achievable number let us say 5% each month for 4 months and then increase it to 10%.If you can save more than that, that is great !Ensure that you do not add this number to existing retirement savings that you already do. (So do not consider any LIC premium or EPF contribution that you are doing already) .Believe me the way inflation is these days we will need every rupee for our retirement. If you buy gold or put it in a FD or PPF just please forget about it(meaning do not look to disinvest out of it). Unlike the stock markets these instruments and asset classes provide relatively stable and risk free returns and you do not need to check their returns daily. Saving an additional 10% for your retirement should not be difficult. As a salaried person I contribute 24% of my basic salary to a EPF account hence I should be able afford another 10% to be saved additionally for my retirement. In case you are not a salaried individual I advise you to set aside at least 25% of your net take home for investing for your retirement. Only for retirement.

Invest a part of your bonus or any additional receipts that you might get into a NSC or a long term Fixed Deposit. The best thing about an NSC or FD is that it has a lock in period for the investment. It would be difficult to disinvest in before the tenure of investment is over. Unlike PPF which has a fixed 15 year terms you can invest in an NSC in different denominations.NSC have a fixed period of 5 years reduced from earlier 6 year period. An amount of Rs 10,000 invested today will give you around Rs 15,000 after 5 years time and you will not be able to break that investment in between. On the other hand if you invest in a PPF fund today then you will only be able to receive the investment proceeds after 15 years. (Partial with drawl is allowed after 5 years)

Part 2 follows soon……

MMRCA – India’s Largest Fighter Aircraft Deal Till Date – 3rd and Final Part-The Rafale and the Eurofighter Typhoon

The Rafale and Eurofighter were selected by the IAF out of the 6 initial contenders. Both have their pro and cons. The Rafale is more battled hardened, tested in Afghanistan and more recently in Libya (Gaddafi had wanted to purchase a few Rafale’s for the Libyan Air force a few years ago!!).Rafale had already flown numerous air to ground operations in Afghanistan before being pulled into the Libyan conflict. The Eurofighter on the other hand flew limited missions over the Libyan air space in support of anti Gaddafi forces .

The Eurofighter is touted to be the better of the two in air to air missions. It’s EJ 200 engine is more powerful than the Rafale’s which means it can fly faster and has a better rate of climb. What it allows the Eurofighter to do is to be able to shoot at its adversary with a greater kinematic force from a higher altitude. It has a bigger nose which translates into a bigger area to house a bigger radar than the Rafale’s. It has the capability to mount a towed decoy mounted on its wings which the Rafale is not advertised to house. The objective of a towed decoy is to try to mimic the signature of the typhoon when it is being hunted by a missile and fool the missile into locking onto it and thus save the aircraft. The absence of the towed decoy is a serious handicap when faced with a barrage of missiles from the air as well as the ground.

The Electronic warfare system of the Rafale on the other hand is touted to be better than the Typhoon. Rafale’s Spectra is touted to be smarter than Typhoon’s Pirate/DASS combination, although the Rafale and Typhoon has never engaged the other in a real war scenario (military exercise do not allow testing of full capabilities of a specific weapon system for fear of leaking sensitive technology).The Rafale may have a smaller nose but its AESA radar is in a much more advanced state of development than the Typhoon’s. Also the Typhoon has had serious funding issues with partner states cutting back on the number of orders for the fighter. It is this issue which probably had swung the deal in favour of the Rafale. Dealing with one nation in a defence deal is a difficult proposition now think about dealing with four of them (as in the case of the Eurofighter consortium) and you have a nightmarish situation for planners in the Vayu Bhavan. Although complete transfer of technology is part of the agreement the final version of the Typhoon “Tranche 3” with the typhoons full features is still a pipe dream. What the IAF would have fretted about was that it would in all likely hood been asked to fund the development of Tranche 3 Typhoon and not the German or Italian taxpayers (they are busy bailing out the Greeks!).The development of the Rafale is much clearer. It has to. Unlike UK and Spain who would also be purchasing the JSF the Rafale is the only 4^th   Generation fighter that the French Air Force is committed to. The French are not buying the JSF, yet !. Add to the fact that the Rafale would also be the number uno fighter for the French Navy you have an aircraft which would need to be upgraded periodically to maintain its edge.No such commitment is available from the Eurofighter consortium. No future development of the Typhoon beyond Tranche 3 is either in the works or announced publicly.

What air force planners would also have noted is that when the UK under pressure from the US had banned the supply of spares for the Sea King helicopter as a post Pokran rap, France was busy discussing with the IAF  on a deal to upgrade the Mirage 2000’s.This plus the fact that the French allowed the Indians to tinker with the source code during the Kargil conflict (using Israeli laser guided kits to bomb Pakistani positions in Muntho Dalo and Tiger Hill) showed France to be a better ally than the Brits when push came to shove. In a future hypothetical scenario in case of a conflict with Pakistan or China it would be easier to deal with one country than four particularly if that one country has been favorably disposed towards you in the past in a similar situation.However, it does not mean that the Rafale is inferior to the Typhoon and that only geo political consideration made the GOI choose the Rafale over the Typhoon.

The Typhoon also lacks two clear capabilities that the Rafale has. It cannot be used as a nuclear platform and it cannot be used as a naval aircraft. With China’s rapidly modernizing navy and its growing belligerence in the Red China Sea it is imperative that the Indian navy has at least 3 large aircraft carriers.

The Navy would do well to order a couple of squadrons of the navalized Rafale’s to station on its aircraft carriers. At present it has the Mig29k’s which would fall short of the Chinese Su-33 of the PLAAN. The Rafale on the other hand would be a completely different beast for the Sukhoi 33 to compete against. The navalized Rafale is already being flow by the French navy and no further development is required to make it fit for carrier operations. India would however, require to invest  in carriers of around 50,000 tonnes with arrester wires and catapult launches to house the Rafale. If the IAF and the Indian Navy both order the Rafale this would bring about efficiency in training, maintenance, development and reduce expenses considerably. As a nuclear platform the Rafale’s edge is a lot less pronounced because one nuclear weapons are rarely used and second it is more economical and efficient to have missiles rather than aircrafts as delivery platforms of nuclear weapons.

Coming back to the capabilities of the two aircrafts which are at par in the air to air mission: The Typhoon has more powerful engines, but the Rafale due to aerodynamics and wing layout has a higher maximum take off weight and hence can carry more missiles and bombs than the Typhoon can.The Rafale also has greater range than the Typhoon. Although modern air forces invest heavily in air to air refuelers in actual war like scenarios shit can happen, refuelers may be diverted or even break down. An aircraft with a longer range is always an added advantage. It would mean fighters can  take off from deep inside India’s heavily defended air bases fly mission over hostile air space and come back to their secure location without having to make a pit stop. The Rafale is also touted to be easy on maintenance. Which means it has a lower logistical footprint. This leads to better turn around rate (more fighters available) and less expensive on the maintenance bill. The Rafale’s smaller nose means that it cannot house as big radar as the Typhoon can. The RBE2 is not AESA radar in its present form but it is no pushover either, in conjunction with Spectra it is an awesome combination if properly used. The Typhoon with its equally superb combination of DASS+PIRATE+ CAPTOR is no slouch either. In a no holds bar air to air contest it would be interesting to see which fighter would vanquish the other.

Both the Typhoon and the Rafale do not have functioning AESA radar, (strange because it was one of the requirements of the MRCA) but both have it as a developmental feature. I guess Dassault would have provided enough technical data and demonstration to convince the IAF that the RBE2 would be developed into a fully fledged functional AESA.

In the air to ground scenario the difference between the two is a little more pronounced.

The typhoon has yet to demonstrate its full range of air to ground capabilities. Missions over Libya have not dispelled these doubts. Even with a more powerful engine due to its inherent design it can carry less by way of fuel and armaments than the Rafale. Its laser guided bombs have yet to be tested. Doubts remain over its primary stand off long range air to ground missile. Whether the long range missiles would be provided to the IAF also is in doubt. The Rafale was designed ground up to be a less observable aircraft, coupled with its aerodynamics its passive electronic system makes it a great bomb truck.

Now that the GOI has finally selected the Rafale as the L1 contract, it has to do a few things very quickly.It needs to sign the contract with Dassault as soon as possible. Any rumors of corruption should be dealt with swiftly, if found baseless the person raising the rumors has to be punished severely. The country cannot afford another Bofors scam. Once the contract is signed, get as many used Rafale’s as possible to start training both the pilots as well as the maintenance crew. This approach is nothing new, India had signed a mammoth contract with Russia for the supply and production of the Sukhoi 30MKI fighters. At the time of signing the contract the Sukhoi 30 in its present form was not ready. The IAF instead of waiting for the final version of the fighter to arrive started to train both its pilots and ground crew on the basic Sukhoi 27 version. This meant that by the time the Sukhoi 30’s started to roll out both fighter pilots and ground crew were familiar with the Sukhoi30.

The GOI must also ensure that it gets transfer of technology in critical areas such as single crystal engine technology, sensor fusion and licensed production of all missiles (All French missiles that are to slated to be carried by the Rafale).The Rafale deal must not be just another plain vanilla military deal.

India has to leverage this deal to be able to build up her own military industrial complex.

The next jet (manned or unmanned) has to be designed and manufactured in India. The Rafale deal is expected to be costing the Indian exchequer more than $20 Billion. Expensive indeed! But as the saying goes, if you want peace be prepared for war.

Concluded

Going for Gold - A case for investing in Gold

Wow …… the Finance Minister raises the customs duty on gold from 2 to 4% and reporters hail the move calling it ”reformist”. Gold to them is an unproductive asset!!  What a bunch of jokers! The additional levy of 2% tax they feel would ensure Indians would invest in more productive assets such as land, stocks and bonds and bring down the current account deficit (loosely imports less exports)

Let’s begin with some sound financial numbers and not fiscal jugglery as practiced by the finance ministry (FY13 budgeted fuel subsidies to be lower than FY12 fuel subsidies….yeah right).Cost of 10 gms of gold in 2007 was valued at around Rs10,000 approx.The value of 10 gms of gold in 2010 end was around  Rs17,000 .Switch over to 2013 10 gms of gold is valued at Rs28,000.

These are numbers which I have tracked and I have purposely refrained from “googling “pre 2007 gold rates.This means that the value of gold has almost tripled from 2005 to 2012/13.Those on  the technical side will note that the value has grown at a rate of 18% from 2007  to 2012/13 compounded annually and by 17% from 2010 to 2012/13 compounded annually. Compare this with RBI bonds (those backed by the Government of India ) which gives a coupon rate of interest of around 8% to 8.5% depending on the tenure. Compare it with the PPF rate of return of 8.5% or even better with the EPF (employee provident fund) rate of return of 8.25% (Government of India reduced the rate of interest from 9.5% for 2010-11 to 8.25% for 2011-12).Even if the returns on PPF and EPF are tax free (this might change according to the DTC under the EET – Exempt Exempt Tax model) it is quite clear which asset class gives a better return. Also  what stops the Government of India from reducing the EPF rate again?

 Imagine the fate of a salaried individual who is  forced to contribute 24% of his basic salary (12% employer's contribution and 12% “our “ contribution ……..entire 24% comes under our CTC!!...do not know why they call 12% as “employer's contribution” then !!) See’s his pension fund interest being dictated by a finance official mandarin, being reduced again?

So my EPF interest rate is at 8.25% while the inflation rate is at 10%! This means that the real value of my pension fund kept in the EPF, inflation adjusted has decreased. The 10% inflation that I talk about is certainly on the lower side.I have yet to consider the price hike in fuel which will take place (at the time of writing the Government  has shied away from raising the price of crude due to the state election) and the insane increment of service tax and excise duty from 10 to 12%.So given a choice where should one invest…….EPF,PPF,government bonds stocks or GOLD!

As stated earlier, I had almost chocked when some so called educated news reporters called gold an “unproductive asset”.Lets compare gold with land .Yes unlike land we cannot grow crops on gold, but what other advantages does land have over gold? Gold can be traded ,more easily than land; legal documentation of ownership of gold is of higher quality ( imagine investing your life savings in a piece of land or an apartment and then discovering that the land had legal ownership issues).True you cannot live inside gold but you can surely sell your invested gold getting higher returns and then purchase a property.

The comparison with property is an important one .No other asset class in India other than property can match the appreciation in gold over a relatively longish period of time .Property prices remained static (not declining like stocks)even during 2008 -09 during the post Lehman Brothers crisis while gold kept appreciating. Yet it is imperative for social security and peace of mind that we all own “our own “apartment or a dwelling to retire to for the day as well as for life.(read not “owned by the bank “!!).

Lets come to stocks (ha ha the great ponzi scheme) .Equity markets are at a high now.Flush with liquidity from QE and the LTRO stock markets are once again in the headlines.Pray switch back to 2008 and 2009 post  Lehman brothers  collapse when the stock markets tanked or a few years earlier when the dotcom bubble had burst or just immediately after the Harshad Mehta scam. Getting a better picture? Investing in a stock market is like playing Russian roulette with a nuclear bomb.Let us look at a hypothetical scenario where a retiree who had invested all his money in a Mutual fund with 100% exposure/investments in equities and by some chance had retired in 2009, his 10 lac investment would be worth around 50% of the invested amount or even lower.

So the next time you read an article in the news paper or hear a smart wizkid on television asking you to invest 50% of your savings into equity ( not gold or property) you know it is time to get a better newspaper or change the channel. Now let us make the situation a bit worse for our poor retiree , let us assume that he had saved his retirement funds for his child’s marriage ( likely scenario in the Indian Context) the value of his savings has gone down from 10 lacs to 5 lacs, the price of gold unfortunately has increased and so has the entire cost of getting his child married. What does he do? He has no option but to sell his stocks or redeem his MF units at a loss and sell off any other property that he has.Worse he might have to go in for a loan (unlikely that any banks will lend him any money since he has retired). A nightmarish  scenario indeed!

You will often hear analyst say that stock markets over 20 years or a longer period of time will give you better returns that bonds or other saving instrument e.g. PPF,EPF etc (they never compare  performance of the stock  market with gold prices inflation adjusted).Yes true but what if in the middle of those 20 years you needed money to finance your children’s education or marriage and the stock market went bust exactly during that time period? Postpone your child’s education or marriage?

The only asset class which has kept itself at par with inflation is gold. A while ago the gold standard was in practice. Under the gold standard countries would keep their currencies pegged to the dollar, any movement in the dollar would lead to a proportionate change in the value of their currency ,keeping the peg fixed at all times.The U.S. in turn fixed the price of gold to the dollar.I am not getting into a debate on the benefits or the drawbacks of the gold standard. The gold standard was abandoned under Nixon in 1971 and the world has moved on since then.

The current global economic crisis precipitated by the situation in Greece, Ireland,Portugal and soon to be Spain and Italy (and many more to follow) have lead  central banks all over to start printing as if there is no tomorrow .Printing more notes unfortunately will just lead to more inflation in the long run. The value of money as a result will go down. Add the coming crisis in Iran and you will see inflation in its worst form. Your EPF returns will keep giving you 9.5% oops 8.25% but the price of a litre of  bottled  water would have increased by 10%!

Where should any rational investor then invest? Surely he has to invest in an asset class which gives him a rate of return higher than the inflation rate.No not stock markets (God do we not learn from the stock market crashes) not in EPF,PPF ,Government  bonds ( try the Greek Government bonds !!) ,land ( yes if you had that much money),apartments (yes good option if you have the money) or do you invest in an asset class which has trebled in last ten years? Keep in mind that you need to buy your house with your own funds, if you borrow from the bank and the bank interest rates keep rising as they have since 2011 to keep inflation in check  your EMI’s will go up sending your already tight budget into a tailspin.(unlike the government we do not have our own mint! ).*EMI’s have fixed interest rate usually in the initial years of the loan before switching over to a floating rate of interest.

In the Indian context it is very important to realize early on in your working life that gold would be a necessity  for your children’s marriage. Gold is hence required not only as an investment asset but also to meet social obligations. Unfortunately I do not see a crash in gold prices. (This would provide me with a buying opportunity).Also remember that gold is a commodity and its supply will one day eventually run out.

When that happens we all know where gold prices will be heading to.

Please also ensure that when you in invest in gold you invest in gold in its physical form and not in its paper form.

DTC- Direct Tax Code

PPF- Public Provident Fund( Voluntary saving scheme) Account either in State Bank of India or Bharat Post

EPF-Employee Provident Fund( Compulsory contributory scheme for most  salaried employee’s)

QE- Quantitative easing.

10 lacs- 1 Million