The Double Edged Sword of FDI

*This was something I wrote for another Economics Blog. Thought I’d just keep this blog alive by sharing it here. Feel free to trash/comment on anything I say.

India’s recent Foreign Direct Investment (FDI) policy stance has raised strong opposition and criticism from smaller businesses and enterprises in the country. This move by the Indian Government comes in lieu of India’s slowing economic growth and isn’t entirely unexpected given the government’s intentions of wanting to “regain investor confidence” (WSJ).

Based on the policy upgrade, “The new regulations allow foreign investors to buy up to 49 percent of domestic airlines and, more controversially, to invest up to 51 percent in retail industry.” (IB Times). The buying of domestic airlines would mean that investors get a greater say in restructuring these airline companies. This would then give foreign firms the ability to set new regulations for airlines companies to meet. Rehiring could also take place and they might send staff from their home country to India to take control of core operations in these airline companies, either as pilots, ground staff or administration personnel. Many Indian citizens might thus become unemployed. Investing up to 51% in the retail industry could damage local Indian small time business enterprises. Locals would choose to make purchases from big brands like Wal-Mart or Carrefour where one’d get better quality goods for the same price. Of course, if small time businesses end up lowering their prices drastically due to the inflow of these retail giants, people might decide to frequent these smaller enterprises instead. This would start a price war and would be good for consumers in the short run as they can take advantage of the lower prices. However, in the long run prices wars might end up threatening the survival of smaller enterprises simply because they wouldn’t be able to compete with these larger firms and would have to shut down from not being able to profit.

There are advantages to having an influx of FDI, however. Big foreign retailers would end up employing the locals, as they wouldn’t have to pay the locals as much. Even in the case of the airline industry, foreign investors would avoid sending talent from their country to India to work as far as possible, as they’d have to pay them more to compensate them on top of other miscellaneous fees (i.e. accommodation, travel etc.). Specific and high skill job positions like pilots might of course be an exception to this. Judging by the number of yearly airline pilot strikes in India, this might not be a good idea either. In addition to exploiting cheaper labor costs, an influx of FDI would ‘help foster stronger economic growth and get unsustainable budget and trade deficits under control’ (WSJ). Output (GDP) is directly related to Investment. Therefore if Investment increases, so would GDP, which would thereby result in long term growth. Also consumers spending at these foreign enterprises would indirectly help relieve India of its budget and trade deficits. If these foreign companies are successful in India, this might further boost investor confidence in the country and pave the way for more Foreign Direct Investments in the future. It would however take a long time for India to reach that point, simply because “The new regulations governing the FDI in retail will have to be adopted by the state governments. But several state governments have said that they will not do so.” (IB Times). Also, things like poor infrastructure might act against the interests of foreign investments.

Having said all this, it isn’t prudent and pragmatic for the Indian government to hand foreign investors such huge stakes in the Indian market. While it may help boost investor sentiments, in the short run, would cause a lot of internal opposition and act as a deterrent to foreign investors as they might feel that it wouldn’t be safe to set up their companies or operations in India due to instability. Also, it wouldn’t give smaller businesses enough time to ease into the new market conditions and find ways to adapt by making structural changes to cope effectively. I feel like it would be a better move for the Indian government to consider giving foreign investors a lower stake in the airline and retail sectors and assure them that they would make the increase with time. Also the government could assure its citizens that it would help them get through the transition. They are already doing that but they should however take a more pro-active approach in the matter. This would be useful in helping quell the immediate violent objections at the very least, which would go a long way in boosting consumer and investor confidence in the government.

References

http://online.wsj.com/article/SB10000872396390444165804578005890328484724.html

http://www.ibtimes.com/india’s-fdi-reforms-boost-investor-confidence-their-implementation-likely-be-slow-794533

The Economics of the iPhone

*This was something I wrote for another Economics Blog. Thought I’d just keep this blog alive by sharing it here. Feel free to trash/comment on anything I say.

Apple recently launched its brainchild the iPhone 5 and trade analysts are already projecting sales figures surpassing that of the iPhone 4 and 4S. What do the increase in sales mean for the economy? The Wall Street Journal (WSJ) answers this question by stating that it could offer a substantial boost to GDP and in turn boost economic growth from a quarter to as much as half a percentage point.

Chief Economist of J.P. Morgan Chase, Michael Feroli mentions in the WSJ Article “IPhone 5 Sales Could Offer Big Boost to GDP” that a growth of 0.33% in GDP from the sale of the iPhone 5 remains reasonable. He makes this assertion comparing it with data during the period of the iPhone 4S sales October 2011 by claiming that the launch of a new iPhone would boost sales of other related goods. He claims ‘over half of the 0.8% increase in core retail sales came in the categories of online sales and computer and software sales.’ when the 4S was launched.

What does this mean in economical terms? From a microeconomic perspective, to a large extent, the iPhone is in joint demand with public goods like computers and online products. For synchronization and arrangement of data/media the iPhone utilizes the iTunes computer program. In addition, one is able to easily access the iTunes store on a personal computer to pay for the applications they download (it usually takes longer on the iPhone). As such, iPhone users would realize the need to upgrade/invest in a computer when they purchase an iPhone. If iPhone sales increase, so will the sale of computers and online products, which would eventually result in a rise in online, and software sales. Collectively the sales would boost GDP and thus result in an increase in economic growth.

From a macroeconomic perspective, the US will see a surge in consumer expenditures from the both American and World Markets. Consumption is directly related to Aggregate Demand (AD) and output. Y = C + I + G + (X-M). With a rise in consumption impacting aggregate demand by shifting it to the right, one could expect to see a rise in short term economic growth (in line with the WSJ article) and standards of living.

The iPhone 5 is an upgrade of the iPhone 4 and 4S. Some of the major new features that it highlights include the new and improved design/display, ultrafast wireless and a powerful new A6 chip designed to make applications run smoother and faster. It however doesn’t offer any feature worthy of regaining dominance of the smart phone market share, which it lost to Samsung earlier in the year. Previously, with the iPhone 4, it offered the voice-based application Siri that gave Apple that edge over other smart phones. Examiner.com examines the competitiveness of the iPhone 5 in the smart phone market and ends by saying “If you find apps and games unimportant and you mainly just make calls with your phone, save your money and use it for a nice weekend with your special someone.”.

Some of the major features on the iPhone 4S are on the iPhone 5 with no change (battery life, 8 megapixel camera) or are already present in other smart phones. For instance, Samsung already has the panoramic feature enabled in its cameras, which Apple newly introduces in the iPhone 5. The lack of anything new for consumers might therefore affect their decision to purchase the phone. Why would consumers switch to an iPhone 5 if they already own a Galaxy Tab, which could do all that the same things? Current iPhone users might prefer to wait it out for the next iPhone and in the meanwhile if another smart phone catches their fancy, they might end up switching to that. Apple thus could possibly end up losing some of its consumers and demand for the iPhone would drop. In turn, the demand for computers and online products would fall causing a decline in GDP growth. Therefore, the maximum economic growth rate projection of between 0.25%-0.5% that Feroli provides might be slightly exaggerated in the idealized scenario above. In the ideal situation presented above it might hover somewhere around 0.1%.

But then again, we’re talking about Apple. The evaluation above therefore might likely be a hugely oversimplified one. In fact, current figures estimate that “The initial supply of iPhones for Apple preorders went in less than an hour, which is much faster than years prior.” according to CNET News. They also speculate that this could be because Apple might not have had “as many available for the preorder crowd” to meet demand. Either way, if the iPhone 5 does end up the fastest selling iPhone, it would be because of its track record and the pre-existing consumer confidence in the brand and not necessarily because it had anything substantial to offer.

 Edited Version

References:

http://blogs.wsj.com/economics/2012/09/10/iphone-5-sales-could-offer-big-boost-to-gdp/

http://www.examiner.com/article/iphone-5-are-the-new-apple-iphone-5-features-worth-the-wait-on-release-date

http://news.cnet.com/8301-33692_3-57513335-305/iphone-5-preorders-indicate-hot-demand/

Summer Update

So I rejoined the service at the end of April. It’s been so wonderful to see so many familiar faces after such a long time away. Some, preparing to leave the service and move on with their lives. Others, dealing with the long seemingly endless wait by choosing to look positive, their eyes and their actions telling a whole different story.

As I prepare to finally ORD (leave the service) I look back with mixed feelings. I feel fortunate to have been part of an experience that doesn’t parallel any other in my life thus far. From, losing all that excess weight when I was a recruit, to marching for the National Day Parade, to being groomed to assume a leadership position in my department, I feel like I’ve had the opportunity to experience and grow from it all. At the same time, I feel like the end of my time in the service signals the end of an era. I’ll never get back a similar period in my life, ever again. Learnt so many valuable lessons without perhaps the pressure of an examination looming ahead. Forged so many new friendships with people of all walks of life (something I essentially never really got to experience given my association with people who had it all). I guess, these are the main takeaways from my time in the service. The lessons learned will surely stand the test of time. It remains to be seen if the friendships will, however. I look forward to the end, however bittersweet it may be. It’s time to finally move on to other adventurous undertakings.

I foresee I’ll be doing quite a bit of traveling before school starts. I can’t quite stay in one place for long periods of time. If I stay in one place for too long, I’d end up feeling suppressed/restless. Looking back, I could never really stay in my dorm room for long periods of time as well. Needed to keep moving around.

Here’s looking forward to what remains of summer!

06/18/12
10:43 AM

After a Hiatus

Fletcher Hall, Ann Arbor, Michigan, USA
04/23/2011
Monday 03:31 AM

First post for 2012!

I’ve just been really busy. Traveling. University. Stress. Exams. This sums up the last 4 months. I’ve not forgotten about the blog though. Been procrastinating writing  a post for too long now. I could’ve slipped a post in somewhere in the middle, but I figure I was lazy.

So for those of y’all who don’t know. I’m now based at the University of Michigan, which is in the beautiful city of Ann Arbor. Atleast for 2/3’s of the year. I’m loving it so much here. Made so many friends. Met so many new people. People with ambition. People with amazing and fantastic goals. Everyone that gets accepted into U of M is so unique and different. Everyone here has ambition and drive. It’s just so overwhelming to meet so many ambitious people. People like me. People who really want to stand out and make a difference in the world out there. I guess that was why they accepted me in the first place.

Enough of that. The past 4 months have been a roller coaster ride of emotions. Keeping up at U of M is not easy at all. I feel like I’ve been tested mentally and emotionally. Many a time, I’ve found myself wanting to tear everything up and scream and run around like a crazy person. This place really makes you feel inadequate and traumatized just because of the insane number of smart people you can find here. But I feel that God’s been by my side. I’ve had a few great surprises over the course of the semester. In particular, my second midterm results. I was below average in both my math classes on my first midterm. Naturally, being me, I felt stupid and was already raising the white flag. For my second midterm, I amazingly managed to do well above average and top my class for the proof portion of linear algebra. Good Grief. I got like a 19/20 for that. Still find it so hard to fathom. I topped my linear algebra class for that.

I just feel like I have so much potential. Clearly I ain’t stupid. Felt so much more confident after that. I just need to hone my skills and sharpen them and excel. Oh, Blair Waldorf inspires me. 🙂

I feel so blessed and lucky to be able to have the resources to do what 90% of people in this world can’t even dream of doing. Sometimes, I don’t even know why God has blessed me with so much. I feel like someone else will be better off where I am. Maybe I’d be better off in Africa as a starving african kid. So grateful to God.

I’ll be peacing-out from Fletcher this Thursday. Had the most amazing time here. Found 2 amazing friends in my roommates, Will and Seth. Will always love and remember you guys. God does everything for a reason. One day our paths will cross. So excited to see how God is gonna make that happen.

So I’m officially done with my Freshman year! I’m gonna be a Sophomore next year! So excited. Feel lucky beyond reason.

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