Solar – New Sustainable International Energy

Energy in various forms has been keeping entire Universe in motion. various names are given as mechanical, Kinetic, renewable energy, potential energy, wind, nuclear energy.

All types of energy has drawn their present condition from Sun in one form or the other. Fossil fuel, Crude oil etc. Except for all renewable energy source, all energy sources are going to vanish sooner or later. It is estimated that we have drawn almost ____% of through extraction of oil wells, Coal, Forests. They constitute ___ % of our present energy needs. What next when we have extracted all of these energy source.

It is estimated that Sun produces ___ jules of energy of which Earth receives ___ Jules,The energy gets reflected due to environment and heat is trapped due to green house. The energy so received by Earth is capable of feeding 100 earth’s

The world electricity consumption in 2018 was 25000 TWh and estimated 8000 billion litre petrol consumption in world is equivalent ot ~72000TWh. This makes our total energy requirement to 100,000 TWh. One Squre Meter SOLAR Panel is capable of generating 150-200 Watts Per Hour. If we discount it by seasonality factor and available day time the per hour generation becomes 29 Watts. One Square miles of Solar Panel is capable of generating 0.029 TWh. To meet Total Energy Demand we will need appx 2% of available land surface of 197 Million Square Kilometer on earth.

We observe that daily Sunlight is able to cater energy needs of 50 earths. The major hinderances are the CAPEX and T&D Costs.

We will need an installed capacity of 11.415 TW to feed world energy demand of 2018. At current cost of 0.75$ per Watt the total CAPEX need is approximately 8.6 Trillion Dollars.

Image

Cow – As an Economic Partner!

Cow is believed to have emerged from ‘Samudramanthan’. She is revered as a Godess by Hindus since Vedic Era because only ‘gives’ since birth to her death. She can help alleviate #Rural Poverty!

A Cow can continue to give us 2-4 KG #BIOGAS per day and can run a rurul kitchen for 10 days.

Its urine can work as a pesticide and insecticides if it is combined with Neem leaf or ‘Nimboli’

It is very effective’s alternatives to chemical fertilizers by enhancing productivity in long term with maintaining the soil health and enhances the microbial population.
Cowdung manure increases Soil’s organic matter, water holding capacity

Most rural population cannot afford conventional sand-cement mixture.
The ‘building blocks’ using Cow dung is low cost, resistant to water and durable.
It maintains thermal comfort (inhouse -temperature)

To promote #sustainable#selfreliant growth in #grams#Cow can play a vital role in #agroeconomics.

The total Economic Value of a cow (inc. value of its horns, skins) is close to crore INR.

With close to 15 Crores Cows, the economic value of Sacred COW is sizeable to GDP!!

Manure helps reduction in Water use for farming and natural food for Earthworm.
Fertilisers kill Earthworm! which otherwise would help rain water seepage of water by converting land into productive soil.

Photo by Magda Ehlers from Pexels

COVID19 – Challenges and Opportunities for India !

Corona-virus has brought down wheels of economies to a stand still with almost all countries in lockdown or emergency mode. Some economies took the risk of continuing production, but ultimately resorted to Lockdown. There is no vaccine at the moment. If at all a vaccine is found, it will take months for its commercial production. Economics, Strategists, Governments are struggling with the damage caused by Pandemic. The immediate priority of the Governments is saving lives, lest Pandemic can be more deadlier as have been in past.

The impact of such pandemics is immense in terms of lives we lose. The impact is demotivating if not devastating on the Economies. The challenges to be faced next will be bringing back economies to normal, unemployment, NPAs, Growth. Historically, Mankind has faced several natural disasters, man made disasters since the start of the civilization.

World GDP has become 18 times (on nominal basis) while Population increased by 4.6 times. In simple terms, the need and life style of people has grown by 4 times in last 120 years. Table below depicts the journey of World GDP, and growth of Population. World output has been mounted by 5 times since start of 20th Century. The New world is no more local, it is inter-twinned, inter-woven. The extent of dependency of economies on each other is paramount.

Any slow down or change in improved lifestyle is demotivating to devastating. Stopping a wheel of 90 Trillions and starting it again will need lot of reshuffling, realignment, stimulus, and top of all TIME. Pandemics are not new to the civilization in past one hundred years at least on 2 occasions the world got devastated. While the countries recover psychologically, there will be change in Economic world order. As will be discussed later, the world’s input needs are highly concentrated to one country China. The Pandemic has caused economies to rethink to avoid recurrence of such havoc again.

The confidence of the world is eroding the way CCP, WHO handled the Pandemic. In order to diversify and mitigate the losses, big countries like US, Japan, Italy, UK have already expressed their willingness to shift manufacturing base from China to other countries. China’s exports close to 2.5 Trillion Dollars on yearly basis (2018). The number is close to the overall GDP of India on nominal basis. People look this event as an opportunity for shift of manufacturing base from China to India. Let us evaluate various factors in context of India in the event their is substantial or large chunk of manufacturing base to India. We are evaluating this scenario because next better available option to world is Vietnam and Indonesia lack availability of Manpower (a basic ingredient to manufacturing process).

First let us examine the kind of opportunity we are dealing with. China’s big trading partners are the big economies where labour is costlier. To domesticate their consumption, these economies don;t have kind of cheaper inputs of production. If at all these countries start to manufacture their own needs, the prices of outputs will be much higher. Let us evaluate the Chinese trade into type of goods being exported, imported and country wise transaction.

Photo by Sabel Blanco on Pexels.com

The Exports of China of $2.5 Trillions mainly includes Capital goods of $ 1.15 Trillions such as Transportation, Machines and Electronics. Capital goods export is almost 46% of its total exports . Next highest category is Consumer Goods (Textiles, Footwears, Wood, Hides and Skins, Food Products, Vegetables, etc.). The exports to US were 20%, Hongkong 12%, Japan 6%, South Korea 4.5%, UK 2.3%, Australia 1.9% Vietnam, Malaysia, Singapore, Indonesia, Thailand put together 11%.

China’s Imports of $ 2.13 Trillion in 2018 included imports 10% from South Korea, 9.2% from Japan, 8% from USA, Germany 5.4%, Australia 5.4%, Brazil 3.9%, Vietnam, Malaysia and Thailand 8.8% and rest other countries. The major component imported were Electrical and electronic equipment 24%, fuels 16%. Rest of imports largely commodities such as metals, non-metals.

China’s top trading partners’

China’s Export to its top trading partner US included 152 $B of electrical machinery, Machinery 117 $B, furniture and bedding B$, toys and sports equipment 27$B and Plastics were 19$B. China imported Aircraft 18 $B, machinery 14B$, Electrical Machinery 13$B, Medical instruments 10$$B, agricultural products 9.3 $B. US Also exported 59 $B services to China.

China’s export to Japan 2nd largest trading partner were Electrical machinery of 52.4B$, machinery of 31.1 B$ clothing 18 B$, and chemicals worth 12 B$. China imported from Japan 52 B$ of machinery, 32 B$of Electrical machinery, chemicals worth 24B$, transport equipments 14.4B$ during 2018.

Hong Kong is China’s 3rd largest trading partner. It can be termed as China’s trading hub since almost all the goods exported by Hongkong to China are for re-export. China’s Export during 2018 to Hong Kong were Electrical machinery of 160 B$, machinery of 44 B$ medical equipments 10 B$. China imported from Hongkong 198 B$ of machinery, 19 B$ of Electrical machinery, and machinery of 39 B$ during 2018. Hongkong’s Import and Export were almost 44.2% and 46.3% respectively and exclusively with China

We see demonstrated above how big is the trade we are talking about. The total foreign trade of China is approxiately 4.5 Trillion $. Its 150% of India’s GDP alone. Shifting base from China to other countries would mean a retaliatory action by China to shift its import base as well. We saw it is not that simple. Another weighing evaluation for sustainable growth of Output is Cost of Factor of production which includes Labour, Rent and Capital cost. The other qualitative factors are supply chain. Let us evaluate each parameter one by one.

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Cost of wages

China’s average wage is 72000 CNY per year, the minimum wage is around 29800 CNY per year, this translates into 43000 CNY (assuming 30% white collar and 70% blue collar); Average of manpower cost is 495 $/P.M.. In India, minimum wage is around 5340 INR/P.M., wages of low skilled labour is 10900 INR/P.M. and wages of high skilled labour is 43200 INR/P.M. The average manpower cost is approximately 212 $/P.M. Personal Income tax rate in China is 45% and Social security tax rate is 48%. While Individual Personal Tax rate is 15-33%, Provident fund is also 24% on basic. Hence The Gap between Disposable Individual Income of two countries narrows down to 65% due to higher SST and IT.

China’s weighted average manpower cost is costlier by 134% as compare to India. Hence this is advantageous not only in terms of Cost but the availability of Manpower is not an immediate constraint.

Capacity and Capability building will emerge as a challenge going forward !!
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Availability of Power

Cost of Electricity a major component in production. China’s Electricity cost is 0.52 RMB/KWH while the same in India is 5.94 INR/KWH. In Dollar both country’s cost of electricity comes out to be 0.078 USD. Availability of uninterrupted power supply for Industrial production is at present a challenge for India. Although, NDA-II Government under the leadership of PM Shri Narendra Modi has geared up for this future need. The All India installed capacity As on 31.03.2020 is 370 GW, a jump of impressive 50% in NDA’s regime. However, the consumption grew by 36% in same period. Currently in 2019 the total consumption of electricity stands at 277 GW (1196309 GWh). A surplus of 107 GW at the moment. Transmission and Distribution Losses (T&D) were appx 20 % in India very high as against averages of world average of 8%. China’s T&D losses reported 5.91% in 2012. The current consumption of electricity by Industrial segment is 41%. We can cater the additional demand for electricity by cutting down T&D losses and utilizing unutilised capacity. But will that be enough if we need to cater increased demand from the world post Pandemic sentiments. This will need a short term as well as long term planning.

China’s 2018, Industrial power consumption sore to 4.72 Trillion GWh (1.1 Trillion Watts) on ~40% of Manufacturing share in GDP. The proportional use of electricity consumed for export is around 341 MW. This is around the total output of India’s all production capacity. For Each increase in Production by 100 $ Billion 14 MW Power needed.

If we can bring down India’s T&D losses to world average of 6%, the balance 14% equivalent to 50 GW would only be sufficient to increase production by $ 300-350 Billion.

Availability of Power is ceiling on aspiration of availing opportunity.
Photo by Quintin Gellar on Pexels.com

Logistics and infrastructure of India and China

Next crucial parameter to compare is Supply Chain Management (SCM) this includes movement of goods (Raw material, Finished goods) from and to ports. The big countries are very particular about quality and turn around time (TAT). We will need to evaluate how we can improve various parameters vital to improve our response time and quality of logistics. India ranks at 44th out of 160 countries, while China stands at 12th Rank in terms of Logistical Performance Index (LPI) published by World Bank in 2018. Smaller countries like Indonesia, Hongkong, Taiwan fares better in terms of LPI. Some of the criterion, which need an evaluation are

  • Customs clearing process
  • Quality of infrastructure in terms of accessibility of inputs and deliverability of outputs
  • Shipments at competitive prices
  • Competitive logical services
  • Ability to track and trace shipments and
  • Timeliness of deliverable

While other parameters can be matched in short run, Timeliness and quality of Infrastructure the are two parameters which India legs behind as compared to China.

Capital Cost in a country is driven by Prime Lending Rate (PLR). Sovereign Banks always use PLR as a tool to incentivize infra and business projects. Current PLR of both the countries China and India are at PAR. So this is not an issue in the evaluation of criterion

Rent is the yield of Investment in Property. This is another factor cost for manufacturing industries. The Rental yield rate is 3.5% in Delhi as compared to 1.8% in Shanghai or 2.5 in Beijing. The Property rates are 2-4 times costlier in Chinese metro cities as compared to India’s metropolitan cities. This way the Rental cost should be lesser in China by almost 40-60%. The State Governments can provide Land at subsidized rate in order to decentralize already choking metro cities. This can be combined with Modi Government’s existing policy of Smart City Project.

FM, Ms N Seetharaman, announced Corporate tax rate for Domestic companies of 25.17% not claiming tax exemptions and 26.0%-29.12% for the companies intend to claim exemptions and incentives. The Corporate Tax rate of 17.16% is a boon for New Domestic Manufacturing set up on or after 1st October 2019. Foreign entrepreneurs will like to setup their manufacturing units as Domestic company to avoid a higher tax rate of 41.60%-43.68%. New tax slabs will make Indian products more competitive vs Chinese output as Chinese Corporate tax rate of 25% is higher by 8% in case of New manufacturing units.

Availability of Technology or Rights to manufacture are assumed to be provided by Import countries at a royalty. Normal Royalty rates are 2-5%. This loss can be compensated from the savings in Manpower, Rentals and Income tax.

Bottom Line

Manpower, Corporate tax rate is a plus point to India in the current scenario of availing opportunity. Power Generation, Supply chain Infra will be a challenge. Our Visionary PM Modi ji has already announced a spent of INR 100 Lakh Crores (appx $ 1.35 Trillion in next 5 years) but this opportunity came too early.


List of PSUs

Central public sector enterprises (CPSEs) are those companies in which the direct holding of the Central Government or other CPSEs is 51% or more.

As on 31.3.2015 there were 298 CPSEs wherein, 63 enterprises are yet to commence commercial operation. The remaining 235 are operating enterprises (covering 181 scheduled CPSEs & 54 CPSEs has been considered provisional).

There are 181 scheduled CPSEs, i.e. 64 Schedule ‘A’, 68 Schedule ‘B’, 45 Schedule ‘C’ and 4 Schedule ‘D’ CPSEs.[1]

PSUInc.MinistryHeadquartersSectorGroupRatna statusWebsite
Agriculture Insurance Company of India2002Ministry of FinanceNew DelhiServicesInsuranceaicofindia.com
Air India Express Limited1971Ministry of Civil AviationKochiKeralaServicesTransport Servicesairindiaexpress.in
Air India Engineering Services2006Ministry of Civil AviationMumbaiMaharashtraEnterprises Under Constructionairindia.in
Air India Limited2007Ministry of Civil AviationNew DelhiServicesTransport Servicesairindia.in
Airline Allied Services Limited1996Ministry of Civil AviationNew DelhiServicesTransport Services
Airports Authority of India1995Ministry of Civil AviationNew DelhiServicesTransport ServicesMiniratna Category – Iaai.aero
Akaltara Power2006Ministry of PowerChhattisgarhpfc.gov.in
Andrew Yule & Co Ltd1919Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesKolkataWest BengalManufacturingMedium & light engineeringandrewyule.com
Antrix Corporation1992Department of SpaceBangaloreKarnatakaManufacturingMedium & light engineeringantrix.gov.in
Artificial Limbs Manufacturing Corporation of India1972Ministry of Social Justice and EmpowermentKanpurUttar PradeshManufacturingConsumer goodsalimco.in
Balmer Lawrie & Company1972Ministry of Petroleum and Natural GasKolkataWest BengalServices & ManufacturingMedium & light engineeringMiniratna Category – Ibalmerlawrie.com
Balmer & Lawrie Investments2001Ministry of Petroleum and Natural GasKolkataWest BengalServicesFinancial servicesbalmerlawrie.com
BEL Optoelectronic Devices (BEL)1990Ministry of Defence D/o Defence ProductionPuneMaharashtraManufacturingMedium & light engineeringUncategorized
Bengal Chemicals & Pharmaceuticals1981Ministry of Chemicals & Fertilizers D/o PharmaceuticalsKolkataWest BengalManufacturingChemicals & pharmaceuticalsbengalchemicals.gov.in
Bharat Coking Coal1972Ministry of CoalDhanbadJharkhandMiningCoal & ligniteMiniratna Category – lbcclweb.in/
Bharat Dynamics1970Ministry of Defence D/o Defence ProductionHyderabadTelanganaManufacturingMedium & light engineeringMiniratna Category – Ibdl-india.com/
Bharat Earth Movers (BEML)1964Ministry of Defence D/o Defence ProductionBangaloreKarnatakaManufacturingTransportation equipmentMiniratna Category – Ibemlindia.com
Bharat Electronics Limited1954Ministry of Defence D/o Defence ProductionBangaloreKarnatakaManufacturingMedium & light engineeringNavratnabel-india.com
Bharat Heavy Electricals (BHEL)1964Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesNew DelhiManufacturingHeavy engineeringMaharatnabhel.com
Bharat Immunologicals and Biologicals Corporation1989Ministry of Science & Technology D/o BiotechnologyBulandshahrUttar PradeshManufacturingChemicals & Pharmaceuticalsbibcol.com
Bharat Petroleum1952Ministry of Petroleum and Natural GasMumbaiMaharashtraManufacturingPetroleum (refinery & Marketing)Maharatna[2]bharatpetroleum.com
Government of India (54%)
Bharat Pumps & Compressors1970Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesAllahabadUttar PradeshManufacturingMedium & light engineeringbpcnaini.co.in
Bharat Refractories1974Ministry of SteelMiningOther minerals & metals
Bharat Sanchar Nigam Limited2000Ministry of Communications & Information Technology D/o TelecommunicationsNew DelhiServicesTelecommunication ServicesMiniratna Category – Ibsnl.co.in
Bharatiya Nabhikiya Vidyut Nigam2003Department of Atomic EnergyChennaiTamil NaduEnterprises Under Constructionbhavini.nic.in
Bhartiya Rail Bijlee Corporation2007Ministry of PowerNew DelhiEnterprises Under Construction
Bihar Drugs & Organic Chemicals Limited1994Ministry of Chemicals & Fertilizers D/o PharmaceuticalsBiharDormant company
Bokaro Kodarma Maithon Transmission Company2007Ministry of PowerNew DelhiEnterprises Under Construction
Brahmaputra Cracker and Polymer Limited2006Ministry of Chemicals and FertilizersLepetkataAssamEnterprises Under Constructionbcplonline.co.in
Brahmaputra Valley Fertilizer Corporation2002Ministry of Chemicals & Fertilizers D/o FertilizerDibrugarhAssamManufacturingFertilizersbvfcl.com
Braithwaite & Company1976Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesKolkataWest BengalManufacturingHeavy Engineeringbraithwaiteindia.com
Braithwaite, Burn & Jessop Construction Company1984Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesKolkataWest BengalServicesContract & Construction Servicesbbjconst.com
Bridge and Roof Company1972Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesKolkataWest BengalServicesContract & Construction ServicesMiniratna Category-Ibridgeroof.co.in
British India Corporation1981Ministry of TextilesKanpurUttar PradeshManufacturingTextileslal-imli.com
Broadcast Engineering Consultants India1995Ministry of Information & BroadcastingNew DelhiServicesIndustrial Development & Tech. Consultancy ServicesMiniratna Category – IIbecil.com
Cement Corporation of India1965Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesNew DelhiManufacturingConsumer goodscciltd.in
Central Coalfields Limited1975Ministry of CoalJharkhandMiningCoal & LigniteMiniratna Category – Iccl.gov.in
Central Cottage Industries Corporation of India Limited1976Ministry of TextilesNew DelhiServicesTrading & Marketingcottageemporium.in
Central Electronics Limited1974Ministry of Science & Technology D/o Scientific & Industrial ResearchUttar PradeshManufacturingMedium & light engineeringcelindia.co.in
Central Mine Planning and Design Institute1975Ministry of CoalJharkhandServicesIndustrial Development & Tech. Consultancy ServicesMiniratna Category IIcmpdi.co.in
Central Railside Warehousing Company2007Ministry of Consumer Affairs, Food & Public Distribution D/o Food & Public DistributionNew DelhiServicesTrading & Marketingcrwc.in
Central Warehousing Corporation1957Ministry of Consumer Affairs, Food & Public Distribution D/o Food & Public DistributionNew DelhiServicesTrading & MarketingMiniratna Category – I
Certification Engineers International Limited1994Ministry of Petroleum and Natural GasNew DelhiServicesIndustrial Development & Tech. Consultancy ServicesMiniratna Category – Iceil.co.in
Chennai Petroleum Corporation1965Ministry of Petroleum and Natural GasChennaiTamil NaduManufacturingPetroleum (refinery & Marketing)Miniratna Category – Icpcl.co.in
Government of India (74%)
Coal India1973Ministry of CoalKolkataWest BengalMiningCoal & LigniteMaharatnacoalindia.in
Government of India (79.65%)
Coastal Karnataka Power Limited2006Ministry of PowerEnterprises Under Construction
Coastal Maharashtra Mega Power Limited2006Ministry of PowerEnterprises Under Construction
Coastal Tamil Nadu Power Limited2007Ministry of PowerNew DelhiEnterprises Under Construction
Cochin Shipyard1972Ministry of ShippingKochiKeralaManufacturingTransportation EquipmentMiniratna Category – Icochinshipyard.com
Container Corporation of India Limited1988Ministry of RailwaysServicesTransport ServicesNavratna Category – Iconcorindia.com
Cotton Corporation of India1970Ministry of TextilesMumbaiMaharashtraServicesTrading & Marketingwww.cotcorp.gov.in
Damodar Valley Corporation1948Ministry of PowerKolkataWest BengalElectricitydvcindia.org
Dedicated Freight Corridor Corporation of India2007Ministry of RailwaysNew DelhiEnterprises Under Construction
Delhi Metro Rail Corporation Limited1995Ministry of Urban DevelopmentDelhiServicesTransport Serviceshttp://www.delhimetrorail.com
East North Interconnection Company2007Ministry of PowerNew DelhiEnterprises Under Construction
Eastern Coalfields Limited1975Ministry of CoalAsansolWest BengalMiningCoal & Lignite
Educational Consultants India Limited1981Ministry of Human Resource Development D/o Secondary Education & Higher EducationUttar PradeshServicesIndustrial Development & Tech. Consultancy ServicesMiniratna Category – I
Electronics Corporation of India1967Department of Atomic EnergyHyderabadTelanganaMedium & light engineering
Engineering Projects (India) Limited1970Ministry of Heavy Industries & Public Enterprises D/o Heavy IndustriesServicesIndustrial Development & Tech. Consultancy ServicesMiniratna Category – II
Engineers India Limited1965Ministry of Petroleum and Natural GasServicesIndustrial Development & Tech. Consultancy ServicesNavratnawww.engineersindia.com
Export Credit Guarantee Corporationof India1957Ministry of Commerce & Industry D/o CommerceMumbaiMaharashtraServicesFinancial Services
FCI Aravali Gypsum & Minerals India Limited2003Ministry of Chemicals & Fertilizers D/o FertilizerJodhpurRajasthanMiningOther Minerals & MetalsMiniratna Category – IIfagmil.nic.in
Ferro Scrap Nigam Limited1979Ministry of SteelChhattisgarhManufacturingSteelMiniratna Category – II
Fertilisers and Chemicals Travancore1943Ministry of Chemicals & Fertilizers D/o FertilizerKeralaManufacturingFertilizersfact.co.in
Fertilizer Corporation of India Limited1961Ministry of Chemicals & Fertilizers D/o FertilizerNoida,Uttar PradeshManufacturingFertilizersfertcorpindia.nic.in
Food Corporation of India1965Ministry of Consumer Affairs, Food & Public Distribution D/o Food & Public DistributionNew DelhiServicesTrading & Marketingfci.gov.in
Fresh & Healthy Enterprises2006Ministry of RailwaysServicesTransport Services
GAIL (India) Limited1984Ministry of Petroleum and Natural Gas

Evolution of USD as forex

What is Foreign Exchange?

There are several accepted Global/Reserve currencies viz USD, GBP, YEN, EURO etc. A country needs currency to settle Import/exports of goods and services and grants and subsidies in various forms.  Besides countries keep Gold, SDR, Sovereign Debts, Treasury bills.  Countries keep Foreign exchange in their vault to regulate exports and imports, meet expenses, repay withdrawing investors in case of war or emergency, settle loans, Investments, and goods & services bills;

Currency Composition of Official Foreign Exchange Reserve (COFER)

The foreign currency reserves of all countries contributes around 58% of USD. Out of 11.418 Trillion USD Forex reserve, 6.617 Trillion USD are in US Denominated USD. This was 51% in Q4 of 2016. Confidence in USD by other countries have been increasing over 2 years.
[Refer Graph 1]

Why USD as an acceptable Forex

US constructed its Gold Repository vault at Denver Mint in 1935. The Gold stored at Denver Mint between Jan 1937 to June 1937 was 10947 metric tones and by March 1941 the Gold storage swelled to 19757 metric tones which was 65.58& of total US Gold reserves.

Prior to 1944 Bretton Woods agreement, most countries were on the gold standard. This also meant that all the countries were liable to settle their currency liabilities in Gold. In 1944, countries met in New Hampshire, and agreed to peg the exchange rate for their currencies to the U.S. dollar. US being having largest gold reserves that time, gave confidence to countries for backing their currencies with Dollar

IMF in 1969, created a monetary reserve currency to supplement existing money reserves of member countries created in response to the limitation of gold and dollars as mean to settle international account

Constraint in Supply of USD to meet increasing needs of the world

During 1970s, in order to combat inflation countries began demanding gold for the dollars. Rather than allow Fort Knox to be depleted of all its reserves, President Nixon in his controversial economic policies leading to stagflation, separated gold from USD pegging (already world’s top reserve currency at that time)

Concerns over US Deficit resulting in value of USD

in 2009, China and Russia raised concerns of intrinsic value of USD in case the inflation sets. US might print US Treasury to support its debts and its budget deficit.

They demanded for a new Global Currency not connected to individual nations and is relatively stable independent of characteristic change in individual currencies.

Yuan was awarded the status of reserve currency by IMF on 30th November, 2015. Yuan also found its place in Special Drawing Rights (SDRs) Basket on 1st October 2016. The other currencies forming part of SDR are Euro, Yen, GBP and USD. To be able to be able to freely trade as forex, Yuan must be free-float currency.

Is USD still a better bet

Answer is Yes, as the other countries hold 6.6 Trillion Dollars in their COFER and any devaluation in USD will lead to severe financial impacts on other countries. Therefore, it is in best interest of the other countries to keep faith in USD.

At the same time, it is important to note that the US Debt-GDP ratio has been continuously rising since 2007 and is at 108% in 2020. The similar ratio was observed in 1941 when World War ended. Since FED rates are very low, a ratio Debt-GDP ratio of 300% is considered as comfortable. This ratio at 50% can be alarming for other developing countries with higher interest rate.

Inflation or Recession in US can lead to higher interest and higher debt servicing ratio, which can raise nerves of other countries. [Refer Graph 2]

Is Gold changing hands? Are we prepared?

An estimated above the ground 190,040 Metric Tonnes Gold exists in the world and 50,000 Metric Tonnes Gold still to be mined.

The Current Gold reserves of top 10 Countries. The total Gold reserves of 20 Countries is 30,000 Metric Tonnes (~18%) of Total gold available in the world.

US Central Bank still number 1 in terms of holding Gold of ~8100 Metric Tonnes is almost halved since start of its Gold Repository in 1941. At the same time. India holds only 633 Metric Tonnes in 2019. While Germany, Italy, France, China, Russia holds sizable chunk of Gold reserves. India needs to evaluate its Gold reserve Position vis a vis its Forex reserves [refer graph 3]

Is increase in Forex a Euphoria?

India’s Foreign exchange reserves rose to all time high and are currently at 476 Billion USD. India’s COFER consists of 6.8% as Gold while rest 93.2% is in foreign currency, SDRs, and reserved position with IMF. The Gold reserve ratio is 16% for the top 20 countries. US Tops the list with 77% as Gold reserves.

US, Germany, Italy, France holds Gold reserves more than 50% of their total exchange reserves. However, China holds 3% and India holds 7% This is a contrast for developed and developing countries. [refer graph 4]

Similarly, Net FDI Inflow of 529 Billion USD since 1998 till 2019 are valuing at 37 Lakh Crores as against their value of investment of 30 Lakh Crores Rupees. MTM liability of reduction by 25% due to dollar valuation. — Saving However, Gold value would have been more than doubled.

The accretion to foreign currency to our foreign exchange reserves since 1998 is 413 Billion USD, however, had this addition to foreign currency been invested at prevailing rate in respective years, the Forex reserves would have valued at 959 Billion USD. [refer table 1].

Of course, market equilibrium of increased demand and limited supply of Gold would try to set in. But then we should also remember that G7 countries hold big Gold reserves.

Bottom line

We have demonstrated that accretion of Gold inplace of USD would have doubled in terms of its current value. Whereas holding USD since 1998 gave us a saving of 25% due to MTM valuation of Dollar. Its time that we carefully evaluate our COFER in order to avoid any unforeseen USD valuation risk for our hard earned Foreign Exchange reserves.


References:

https://www.thebalance.com/world-currency-33059312

https://www.investopedia.com/terms/s/sdr.asp

GET https://api.exchangeratesapi.io/latest HTTP/1.1

India is 3rd in terms of GDP at PPP

Nominal GDP is the aggregation of all Gross Value additions in one year in any country at prevailing prices. It sums up all Business outputs, Business Investments, Government spending and Net Imports

Nominal GDP of top 10 Countries

“World Economic Outlook Database, October 2019”IMF.org

But wait before we jump into conclusion let us try to understand how the denominator USD itself gets calculated

We all know value of one Rupee today is more than one Rupee tomorrow. This universal truth is valid for all the ‘financial assets’ in the world (including Fixed Deposits, Shares, PPFs, etc.). If we deflate value of a Dollar in 1960 with the yearly inflation that US underwent till 2019, the residual value of a dollar is 11.6 cents. Similarly a Rupee in 1960 has a purchase value of 1.4 Paisa due to inflation in India. We saw that Indian currency lost its value on time horizon faster than USD due to relatively higher inflation rate viz a viz US economy’s inflation. Indian Rupee lost its value 8.26 faster than USD. When we multiply this inflation parity factor of 8.26 with exchange rate of 4.76 INR/USD as on 1960, we get value of 39.33. This is the value of Dollar had all the valuations being driven by inflations/deflations.

Dollar value versus INR (split between inflation and other factors)

But that is not the case as Dollar rate on 2019 was 71 INR/USD. There is a settled gap of 32 Rupees as on 2019. This means that parity rate is not purely out of inflation of countries, there are other factors responsible for the gap in parity index such as standard of living, cost of living (inflation), resources of countries, fiscal health of the countries etc. viz a viz to each other.

The Big Mac Index is the price of the burger in various countries that are converted to one currency (such as the US dollar) and used to measure purchasing power parity. As per Big Mac Index USD should value at 33 INR in terms of purchase power of an identical burger in India vs USA. INR 33 is Not very far from our calculated value of 39 INR. As we mentioned earlier, this is due to several factors working simultaneously on the valuation of relative parity index of two countries.

Big Mac Index source :https://fxssi.com/big-mac-index
Hey we just demonstrated that the value of burger is different in different countries

The World Bank releases PPP index calculated by estimating set of prices for items chosen from a common list of precisely defined items participating countries. These common lists include both regional items, priced in the region, as well as global items, priced in all ICP regions. These sets of prices cover the whole range of final goods and services included in the GDP: household consumption expenditures, government expenditures, and gross fixed capital formation expenditures. [2]

Now that we have Nominal GDP in local currency and PPP Index, let us divide both numbers. you will find a new global power order. China tops the list with 27.31 Trillion USD followed by 21.44 Trillion USD and India at number 3 position with 5.75 Trillion USD GDP at PPP.

BJP leaders must stop saying publicly that India’s GDP sixth largest in the world. … India’s GDP third largest today

Dr Subramaniyam Swamy (Rajya Sabha MP, Fmr. Union Cabinet Minister, Harvard Ph.D in Economics ) in his tweet on 19th March 2019

References

  1. https://www.worldbank.org/en/programs/icp/brief/methodology-calculation
  2. “World Economic Outlook Database, October 2019”.
  3. http://statisticstimes.com/economy/gdp-nominal-vs-gdp-ppp.php

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