FINANCIAL CONTAGION

For want of a nail the shoe was lost.

For want of a shoe the horse was lost.

For want of a horse the rider was lost.

For want of a rider the battle was lost.

For want of a battle the kingdom was lost.

And all for the want of a horseshoe nail.

Above I share a well known parable of chaos, the situation where the kingdom is eventually falls because of horseshoe nail. Financial contagion is somewhat similar to this situation whereby the small shocks which initially affect only few financial institutions or a part of any economy spread to the rest of the financial sectors and other countries whose economies were previously healthy. It spreads like an infectious disease across all aspects of the world economy. How does financial contagion occur, what is its importance and what can be done about it? To answers all these questions it is important to develop an understanding of recent financial crisis.

Financial contagion happens at both the international level and the domestic level. At the domestic level it happens when the domestic bank fails or when the financial intermediary defaults on interbank liabilities and sell assets at extremely discounted prices when they face bankruptcy. An example of this situation is the failure of Lehman Brothers in which the large part of their portfolio comprised of outstanding loans for buying real estate and with the meltdown in the property market in US there was a huge deficit and because of this most of the loans became irrecoverable leading to bankruptcy, henceforth they were forced to make fire sell. Other examples are the subsequent turmoil in the US financial markets.

International Financial contagion happens in both the advanced and emerging economies. The financial crisis here spread across all the financial markets of all the economies. In the present financial system where there is large volume of the cash flows as hedge funds & the existence of cross-regional operation by large banks makes financial contagion simultaneously both among domestic institutions and across countries.

Henceforth it is important to understand how shocks are transmitted between countries so that measures can be taken to reduce this situation and the instability it causes in emerging economies that greatly need stability in order to develop and grow. Financial markets and financial intermediaries play an important role in transmitting shocks across regions. The significant change in portfolio strategies of financial investors due to the crisis in one market may also affect asset pricing in markets that are distant in many ways from the one in which crisis originates. The transmissions of shocks are also influenced by the decisions of domestic and international policy-makers.  Specifically, the international repercussions of a shock in one country may be magnified by the action of domestic policy-makers, as well as by the reactions of those in other countries. The rise in cross-country co-variance of asset prices can also results in financial contagion. Investors are concerned with the benefits of portfolio by diverging there assets and if cross-country co-variance of asset prices are significantly higher in periods of crisis, the portfolio diversification may leads to loss.

As a result it is necessary to find some methods to reduce financial contagion and the instability it causes in emerging economies to facilitate development and growth in the emerging nations. One way it can be reduced by reducing the instability of their financial markets by proper guidance and information to the investors which fosters stability in developing countries. Other way it can be reduced by reducing information asymmetries. As has been seen that higher the degree of asymmetric information in a market, the greater the effect of financial contagion in that market. Henceforth, the steps should be taken to increase the availability of information to all investors along with the transmission of shocks between markets. Apart from asymmetries information financial contagion can also be reduced by closing the channels of contagion. It is seen that financial contagion often flows between developing economies through developed economies, therefore if the cross-market rebalancing is limited within the developed economies, which can better handle the financial contagion, shocks would not be transmitted to the developing economies which are less likely to handle the trauma.  If the information regarding the occurrences of cross-market rebalancing and other forms of contagion in the developed economies is passed to the developing economies, the effect on the later would be lessened. Moreover, the phenomenon of financial contagion makes a very important study regarding investor’s behavior. Financial markets are contagious in front of financial crisis of other markets because of the investor’s behavior whereby the investor’s think that shocks registered on a robust market are most likely to transmit to a smaller stock exchange market. These shocks are transmitted only if they are negative, i.e. indicating a decrease in the value of financial securities. Hence we can infer that investors are more tempted to imitate the behavior of other investors when they think they will lose otherwise.

I think financial contagion cannot be totally curbed out in the financial market but it can be reduced. The first step has to be the proper guidance, education or information to the investors as we have seen that investors play the vital role in transmitting financial contagion. It will not only help the economies but  the individuals as well. By having proper report of the market one can have comprehensive knowledge and can enjoy investing in the market. The instability in the market can only be reduced if investors are well versed with the situations. The TV channels like CNBC, NDTV etc. are doing the best job in providing the crucial information but still what I feel is that, before investing this work should be make mandatory. Apart from them the educational institutions should introduce a subject regarding stocks at the school level so that the students can acquainted with the financial markets. For the long term investment one should go through the five year plans about the economy which is prepared by the planning commission of India as the companies make their policies with regard to five year plans.

While some say that strong linkages across all the economies are not necessarily contagious, and it is defined as an increase in cross market linkages after a shock to one country, which is very hard to figure out by both theoretical model and empirical work. While some scholars say that there is actually no contagion at all, it is just the irrational behavior of the investors which is the evidence of co-movement in the asset prices in all periods. 

SCOPE OF RETAIL MARKET IN INDIA

A successful retailer must not only have the right products at the right place and the right time but also at the right price. The India Retail industry is the 5th largest in the world. Comprising of organized and unorganized sectors, the industry is one of the fastest growing industry in India over the last few years. Initially the India retail industry was predominantly unorganized however with the change in taste and preference of the consumers in India the industry is getting more fashionable these days and getting organized as well. In 2010, the retail trade in India accounts for 12% of the country’s GDP. The present value of the industry is estimated to be around Rs. 12, 00,000 crore ($270 billion) and the annual growth rate is 5.7%. The organized retail sector accounts for close to 4% of the total retail market. According to ASSOCHAM "The organized retail sector with emergence of new store formats is recording phenomenal growth and will completely revolutionize retailing over next 3-4 years".

The Retail industry in India is ready to take on challenges from the international players like Wal-Mart & France’s Carrefour because contrasting to them they have a better idea about the Indian consumer’s understanding. To achieve success in India, any retail firm must be able to connect emotions, culture and values of the Indian environment rather than imposing alien values or concepts on the customers. Information Technology also plays an important role in running the retail business of high magnitude and India enjoys lofty IT base. Moreover only 4% of India’s retail market is organised and there is tremendous potential for growth in the retail sector. Almost all large companies worldwide are looking to establish a base or a stake in the Indian market. In this scenario, the Indian retail sector must take the initiative to realise the ideas of contributing to a prosperous and booming economy. In the near future India will see a phenomenal growth of shopping malls, speciality retail outlets and fashion stores for youth. Speciality retail outlets and malls are the future of Indian retail market.

Retail Industry is also facing some challenges. The industry is facing a severe shortage of talented professionals, especially at the middle management level because the professionals  does not focus retail sector, as this sector is emerging now from its nascent phase. The tax structure in India favours small retail business and thus more and more of the market players prefer against non expansion and cost benefit. Though the government is going to implement uniform value added taxes across all the states, the system is beleaguered with differential tax rates which lead to increase in costs and complexities in establishing an efficient distribution network. Further finance minister Shri Pranab Mukherjee imposed 10% excise duty on all branded apparels in the union budget 2011-12. All the big retailers along with about 4000 small retailers keep their stores closed for a day against the protection of this duty as it adversely affect consumers, apparel makers and retailers and also the bandh for a day caused heavy loss of revenues to the firms as well as to the government in form of taxes. Again lack of adequate infrastructure facilities with respect to roads, electricity, road chains and ports has further led to the impediment to the network of suppliers. Henceforth, retail chains have to depend on multiple vendors for their requirements, thereby raising costs and prices. Most Indian retailers are now concentrating on making their supply chain more efficient so as to deliver high quality service according to the demand of consumers thereby the intermediation would increase the costs by 15%. The retail sector is not having the status of ‘industry’, thereby it is difficult to raise finance from banks to fund their expansion plans. In addition to this there is high stamp duty and lack of ownership titles due to which there is unorganised nature of transactions. Government restrictions on the Foreign Direct Investment lead to an absence of foreign players which results to limited exposure to best practises. In the long run it can lead to greater efficiency and improvement of living standards by both price reductions and improved selection brought about by the technology of the foreign players in the economy. This in turn can lead to increase in output and in domestic consumption. Moreover allowing greater FDI in retail will also help the government in meeting its foreign exchange requirements.

Opponents of the entry of FDI in retail trade generally point to its adverse impact on employment and certainly it is an important concern, as around 40 million people are engaged in retail trade in India and a small percentage loss of employment in this sector will make lakhs of unemployed. Entry of foreign players will also disrupt the current balance of the economy. However the government of India has a more liberal policy towards wholesale trade, franchising, and commission agents’ services, which ultimately prepares the ground for FDI in retail as well. Foreign retailers have already started operations in India through various routes like joint ventures, franchising (Nike), sourcing of supplies from small-scale sector,  ‘cash and carry’ operations (Giant in Hyderabad, Metro in Bangalore) and non-store formats – direct marketing (Amway). In the year 2002, the world’s largest retailer, Wal-Mart, opened a global sourcing office in Bangalore and in 2006 it announced a joint venture with the Indian company ‘Bharti’ where the two firms will have an equal share in the business in wholesale, logistics, supply chain and sourcing activities.

The India Retail Industry also enjoys opportunities as well. In the organized sector, the Industry is least competitive and least saturated and therefore the global retailers have an opportunity to take advantage of the more favourable FDI rules that are likely be implemented  in India and will enter in Indian market through partnerships with local retailers. As per the experts, good talent pool, huge markets and availability of raw materials at cheaper costs is expected to make India as the one of the world’s best retail economies. The industry will create huge employment opportunities as the organised retail is just over 4% of the total retail market in India thereby leaving a huge untouched opportunity. The retail industry in India is currently growing at a great pace and is expected to go up from US$833 billion in 2013 to US$ 1.3 trillion in the year 2018 at a CAGR of 10%. As the country has got a high growth rate, the consumer spending has also gone up and is also expected to go up further in the future. In the last four years, the consumer spending in India climbed up to 75%. By the year 2013, the organized sector is also expected to grow at a CAGR of 40%. Thus the retail industry in India can be considered to be highly prospective both in the short and the long run.

The India Retail industry is the 5th largest in the world. Comprising of organized and unorganized sectors, the industry is one of the fastest growing industry in India over the last few years. Will it continue its growth in the near future?

“SPOTIFY”- A Tryst with Technology

“Spotify’s a different kind of service, it allows you to stream music event if you don’t own it. So perhaps Spotify will think iCloud is really just second hand news”- BBC’s Rory Cellan-Jones.

 “Music is life and life is Music”, one of the firm notation which I believe strongly in. It takes you to an emotional level which is not matched to any other source of entertainment. Listening online music is one of the best ways to stay in the perfect mental state. With the growth of Internet the demand for online music is gradually increasing which increases the demand for the streaming music services.

Music streaming services are becoming gradually more important with the growth of the Internet because most of the users do not have fast access to download large multimedia files quickly. Through Streaming, the client browser or plug-in can start displaying data before the entire file has been transmitted.

“I have been using Spotify for over a year now and I believe it has redefined streaming music. Now I think its redefining personal and social music. Their latest iteration of their desktop application integrates beautifully with Facebook. You can see a friend’s profile, which includes their favourite’s artists and saved playlists”. – Andrew Mager

There is a new planet of music waiting, “SPOTIFY”. Europe’s extravagantly successful streaming music product has just shown us the future. Just like other streaming music players like Pandora, Grooveshark, Last.fm, MOG.com and Lala, Spotify delivers a huge music collection which one can listen through Internet, Mobile device, Desktop client or in Offline mode. Spotify created in October 2008 by Daniel EK and Martin Lorentzon in Sweden. The service has approximately ten million users as of 15 September 2010 and about one million of whom were paying members (source: Spotifywiki). Co-founder Daniel Ek said “he wanted to create something better than pirating music which is fast, simple and free to an extent”. Spotify will let the user stream all one wants from a library of 15 million songs at no cost. It is currently accessible with Microsoft Windows, Mac OS X, Linux, Telia Digital TV and mobile devices running iOS (iPod/iPhone), Android, Windows Mobile, S60 (Symbian), webOS and Sonos.  It is increasing its network throughout and as of now the service is available in Finland, France, Netherlands, Spain, Sweden, UK, US and soon Denmark because it takes time to arrange licensing agreements with record labels and local publishing right societies.

One might not even be aware of the rival that is attacking the music titan of the past decade when iTunes is about to mature completely and rapidly. The same was being accomplished by iTunes during early 2000s when it set the stage to decimate Tower Record-a retail music chain which currently exists as an international franchise and an online music store. For those who are not aware, Spotify is a digital right management based streaming service that allows users to stream selected music from a range of record labels. It has a wonderful selection and is compatible with the computer, smart phone, tablet & android phones and is backward compatible to play music from existing iTunes library.

Just think of Spotify as your new music collection. It enjoys complete advantage over iTunes in delivering music with its relative pricing. Although iTunes and Spotify deliver music over the net, Spotify’s price is far below the level of iTunes. For $10 a month, you can enjoy unlimited music as long as you are listening through Spotify music player. It has associated its business model around low pricing. ITunes does not stream music; it requires you to download songs to your iOS before you can listen whereas Spotify is one of the top online services for streaming music. With Spotify, all the music starts streaming right away without any cost. The unique service Spotify offers is that you can use its Offline Mode which allows you to ‘dial an album’ to listen thousands of music tracks without connected to the web at no extra cost. Along with the subscription plans, the service also offers the chance to listen before one can make purchase with the Spotify Free account. Through “Scan and Match” service Spotify scan the tracks on your computer and then download those to your mobile device without synchronize your device with the computer. Spotify also allows you to listen song even when they don’t own it, thereby help you to create your own better playlists and this playlist on your computer will sync to all your mobile devices making it easy to take your playlist on the go. The social feature of iTunes ‘Ping’ is just a wash at present whereas Spotify makes the best use of social networking. You can listen to the same songs your friends are at ,free of cost through Facebook which is built in to the desktop application. You can also share your favourite playlists with your friends over Facebook, Twitter, Flickr and e-mail, just send them a link to a track or playlist and right away they can listen to it. Spotify integrates with last.fm service, henceforth by activating last.fm every song you listen to will be sent to last.fm so that you can get recommendations for new tracks. Spotify integrates with ‘Shazam’, the iPhone application which can recognize songs just by listening to it. Now if you hear a new song you like, just by ‘Shazam’ you can download it with no extra cost.

In order for Spotify to continue the success story, the music industry needs to get completely on board with their music existing in the cloud. One of the users of Spotify says “I am listening to on Spotify and as a consumer I don’t see why I should even want to. There is the option to buy, of course, but after playing around with Spotify for two days I never once felt compelled to purchase a song. I know they’ll be there waiting for me the next time we log on, so why should I bother clogging up precious memory space on my computer by actually buying them”.

To this I would say that the music industry needs to find a way to become completely comfortable with the idea of legal streaming because after two days of poking around Spotify, it is clear that this is going to be the future of music industry and this is what the music industry should look like. It’s no wonder some of the companies are holding out but as someone on the consumer end of the spectrum Spotify is a wonder to behold.

JIST:-It’s time to leave the pirating to Jack Sparrow..!! The new planet of music industry is on the GO..! Discover it with “SPOTIFY”.