Reasons for slowdown in the World Capital Market in 2008

The beginning of the year 2008 saw slowdown in the capital markets all over the world. Starting from developed Nations like US and Japan to India and China the stock market indices experienced a huge drop. Some researchers say that one of the major causes of this recession is the overall increase in the general price level which is clearly visible across all sectors of the economy all over the world. While there are others who have the view that it is due to the upcoming US elections that are due in November 2008. Inflation is no doubt an important factor influencing fall in the stock market. Because of this inflation, cost of production rises. Now as the cost of production rises, price of goods rises. As per simple economic law of demand, as price rises demand falls. This fall in demand will result in the fall in revenue and hence the profit margin of the firms. This reduction in profit margin of the firms will influence stock price to fall.

The most important factor which is causing inflation is the rising price of crude oil all over the world. This rise in oil price is causing transportation cost to rise, which in turn is accelerating the general price level.

Again if we consider from the point of view of US elections, the two major parties that are contesting the election are the Democratic Party headed by Barack Obama and the Republican Party headed by John McCain. If Democratic Party comes to power, then as promised by Obama, there would be no outsourcing from US to the developing countries like India and China. This will lead to slowdown in growth of the Service sector in these countries and hence a fall in the stock price in the capital market. To prevent such risk International investors are in the process of taking out funds from the capital markets of these developing countries. Now with the taking out of funds, there is an excess supply of these stocks in the market, leading to an a fall in the price of individual shares which in turn is pushing the stock market indices down in these countries. Moreover there has been economic slowdown in the US resulting in a downtrend in the US capital market too.

Now the question is: Will this slowdown in the stock market continue in the years to come?

The answer is obviously no. This is because, History says that with time the income of people had risen and it will continue to do so in future. This rise in the income of the people will raise the general price level and so there will be always some inflation. However, in the present scenario, inflation has risen too much, leading to fear among the investors, who are now in the process of withdrawing their money from the stock markets. Now the Central Banks across the globe has already resorted to various monetary policies to control inflation, which will definitely bring down inflation in the months to come as it has happened in the past. Moreover International investors are looking forward to the US election in November 2008. As soon as the election gets over, new investments will definitely trigger from the beginning of the New Year 2009 or probably from the beginning of the next financial year i.e, April 2009. Small and long term investors should therefore focus on investing during this year, as they will be getting large cap stock at a high discount and hence when the stock market takes a positive turn at the beginning of the New Year, they will get their money back with high premium.

Land Acquisition in West Bengal and its impact on the Indian Economy

The left front Government that came to power in West Bengal in 1977 after defeating the Congress was the Government for the people. They relieved the people of West Bengal from the dreadful Nexalite movement that kept people of the state awake for nights in terror. They called themselves to be the friends of the poor farmers and landless laborers and started “Operation Barga” in 1977 itself. Not only this, they implemented land reforms in West Bengal to transfer landholdings from big farmers who hold large areas of land to poor farmers so as to remove disparity in income and employment. In this way agricultural development in West Bengal took a firm base and the state became one of the leading agricultural producers in India.

However, circumstances changed with time. Slowly with the Globalization of the Indian Economy, the left front Government in West Bengal also started Globalizing themselves. The seventh Left front Government that came to power in West Bengal under Chief Minister Buddhadev Bhattacharya in 2007, became aware of the fact that without Industrialization employment generation in West Bengal will not have a firm ground. The Government started inviting International investments like the Salem Group of Indonesia to set up a Chemical Hub at Nandigram to convert it into a special economic zone. Moreover, the Government also acquired land from the farmers of Singur, for Tata small car project (Tata Nano).

The initiative of the government to acquire land for industrialization is no doubt a brilliant idea. But the sad part of the thing is that the Government acquired agricultural lands capable of multiple cropping. Had the Government acquired barren land for industrialization, it would not be an issue. But the Government, instead of acquiring barren lands acquired highly productive lands without thinking about its future impact on the Indian Economy.

The impact of acquiring agricultural land for industrialization is very dangerous and may even lead to Economic recession and this is in fact true if we analyze it carefully from the simple economic point of view. It is widely accepted in Economics that agriculture and Industry are interrelated, each supporting the other. Agriculture provides raw materials to industry and food to the people who work there, while Industry provides a large number of machine made consumer durables and even fertilizers to agriculture. Now acquiring of agricultural land would mean reduction in agricultural production. At the same time with Industrialization disposable income in the hand of individuals increases and people demand more food. At the same time with acquisition of agricultural land for industrialization, production decreases. This results in an increase in the price of agricultural commodities such as rice, wheat, sugar and edible oil which is in fact is now noticeable from the present market scenario. Now as price of food grains rises, price of other goods also increases, leading to an increase in general price level. This results in inflation.

Now foreign investments occur only because labor is cheap in India. With inflation, cost of labor will rise and International investors will prefer to shift to a country with low labor cost. This process will again lead to de-industrialization in the Indian Economy and hence recession of the economy.

So why prefer such a process of industrialization which will take us back again to de-industrialization and recession in the long run.