Saturday, 24 January 2009

State of the Economy and State of the State

Inflation inched up to 5.6% in the last week, it was attributed to the truckers strike during the period of study and all the big names in the financial industry are talking about inflation easing to 2-3% in the next three months. On top of this, these big names are calling for further rate cuts and reduction in statutory ratios for banks. India does not have a Glass Steagall Act, but it is common knowledge that investment banking and commercial banking are kept at arms length in the Indian banking industry. This arms length has significantly shortened in the last five years. In the banking parlance we have a new way of talking about this. Instead of calling these activities investment banking and commercial banking activities we call them by the kind of income they generate and name them as "fee based Income" and "Fund Based Income". Of course some investment banking activities would be fund based activities and therefore they form a grey area.

Now, if the rates are lowered and, what would happen? I happen to run a small "fee based business" and I am drawing this from my own experience. Banks have a PLR range of 12.75% to 13.25% (official RBI figures) and deposit rates of 7.5% to 9.6%, this leads to a margin range of 3.15% to 5.75% on the higher and the lower side. Risk aversion is the rule of the day fr banks these days, bankers these days are wary of giving loans. They prefer to have treasury income rather than interest income. meaning there is a positive bias towards the investment banking conundrum rather than the rig morale of commercial banking. because of the risk aversion I do not expect bankers to lower their PLRs, even if they lower their PLRs they will charge a premium on the PLR for all kinds of customers other than prime customers. Coming to think of it, if we go by the usual definition of the prime customer: steady cash flows, consistent declaration of profits, consistent IT returns, consistent IT payments, etc. i would say majority of Indian customers, individual as well as corporate fall under the sub-prime category. Then what do we do with the lowered PLR? Do we need this PLR only for declaration purpose on the RBI web site? Banks will still have a bad choice of borrowers and therefore will always be risk averse. Therefore expect banks to make more profits but at the cost of taking higher risks. (That's really a nobrainer as more risk only means more profit and there's no such thing as reckless profit)

Now the STATE of the STATE. All these days we had a government which was running on the steam and momentum provided by the Keynesian pump priming done by the earlier NDA government. The present regime was always waxing eloquent about growth rates and was complacent with doling away the tidings brought about by the higher growth rate. Economies grow or de-grow after a lag of two to three years of taking action on the economic system. now that this government is completing its term of inaction, complacence and profligacy, we have the PMs panel re rating the growth to 7% from the earlier projection of 9%+ growth. Has this been due to the global financial crisis? notwithstanding the global financial crisis the momentum of growth could have been kept up by committing public funds to developing infrastructure, housing, water supply, power generation, electricity supply, primary education, secondary education and other such worthy causes. But all these were given a go-by and the government resorted to the age-old "congress" method of appeasement and cheap populism of subsidising the rich farmer.

After this disaster, now we will be a country with an actually inactive Prime Minister for the next four months. doesn't congress have one able man / woman to entrust the top job? If the PM undergoes a cardiac surgery and has to convalesce for three months, can't this country find a replacement for this honourable man? Do we have no choice left at all? Why should Pranab Mukherjee chair cabinet meeting as the stand-in PM? What happens if we have a 26/11 type of a situation again or if we are forced to go to war with our ever friendly neighbours? Why can't the stand-in PM become the real PM? Where are all the so called strongmen from Bihar, Maharashtra? Why don't they claim a stake for the PM's gaddi now? Why should we rely on a Prime Minister (I have high regards for his stature and ability when he is physically fit) who is undergoing a bypass surgery for the second time and is required to take rest for three months? Can we afford to give a three month medical leave to our Prime Minister during this hour of crisis?

Tuesday, 20 January 2009

Welcome OBAMA

Today we brace ourselves to welcome the greatest event in the history of Mankind. A human being of a different colour is being sworn in as the President of a Country ravaged by discrimination on the grounds of colour. This is an unique even for one more reason, the Man who is being anointed as the President of United Sates of America also reflects true internationalism. He is born of an American woman and an African man, not only diverse in colour but also diverse in citizenship. Apropos! to the citizens of USA for electing the true American Spirit as their flag bearer for the next four years. Another unique thing is happening in these times, All this while a drastic change in the leadership would happen after a large crisis / catastrophe or a revolution. But here we see a slow churning and a slow revolution happening, a drastic change in leadership has come about after a smooth sailing for the last sixteen years for the economy. When Obama was declared elected, the economic fallout of the financial crisis was not yet fathomable.
Now, lets get back to business. Obama has his task cut out for the next two years at least. He has to grapple with failing corporations, there will be a strong appeal for reinstating the Glass Steagall Act, which separated the Investment Banks from the commercial banks. Isn't it curious that after the great depression the Glass Steagall Act effected a separation of commercial banking and investment banking. This act was repealed in 1999 and after the sub-prime crisis the same thing is being undone by allowing investment banks to be treated as commercial banks by giving them access to federal reserves funds and the discount window of the fed.
Next on the agenda will be the choice to bail out corporation or individuals. If the corporations are bailed out will the effect trickle down to individuals? Wouldn't it be practical and better to bail out those in individual debt traps and not bother about the corporations? if corporations are bailed out then it will be assumed that you need to become BIG and make BIGGER mistakes to be bailed out. small (individuals and companies) and smaller mistakes (which actually wipe out the individuals and the small companies) will be left to fend for themselves.
Obama regime will also have to think again about the uni polarity of the world. Due to which a great responsibility has been thrust upon the white house. Since there is no visible counterweight to the power of America, a hegemonisitc attitude will jeopardise the delicate balance and may result in America against the world. To take a leaf out of Obama's professed idol and quote "power corrupts and absolute power corrupts absolutely" will not only hold good for individuals but for countries too. So this appeal to Mr. Obama and his regime to understand the the will of a majority of people of the world and also understand that their mandate now is to provide leadership not only to their country but to the world as a whole.
Welcome Mr. Obama, may your tenure be remembered as a path breaking tenure, which would need to "sarve jana sukhino bhuvantu" meaning let all be free and therefore happy.

Wednesday, 7 January 2009


Mr. B Ramalinga Raju, resigned as the chairman of Satyam and admitted to misreporting the finances of the company. There are reports of Rs.5000 crores missing from the cash and bank balances of the company. How did the auditors price waterhouse certify the balance sheet? Did they verify the bank accounts and find out whether the deposits actually existed on 31st March?
Do the auditors actually audit? or they send the interns to have a ball at company's expense and then tick whatever papers are dished out at them? Do the heads / honchos / partners of the auditors team get a cut on the amount mis-stated? Can we ask these questions to the ICAI or the auditors themselves?
Corporate Governance INDIA ISHTYLE
Take a look at the composition of the boards across the corporate India spectrum. You will find that there is a group of people who specialise in being Independent directors of companies. you will find familiar names on scores of companies. Most of these people are retired bureaucrats, powerful lawyers, retired senior executives from public listed companies, fellow industrialists, etc. the entire operation of appointing independent directors reeks of "You scratch my back and I scratch yours". Independent directors are treated as show pieces and are highly pliable to the whims of the promoters. The Audit committee, Remuneration committee and the Investor Grievance committee seem to work only in letter and not in spirit. Clause 49 report seems to be only a case of filling up a form and submitting it to the exchanges.
If promoters are going to camp with the booty on a continuous basis across the decades, remember MS Shoes, Time Shipping, DLF Cement, scores of vanishing companies, Finance-IT-Bio tech companies. We can only blame the gullible public of India and the slow and inept regulatory system for our woes. This calls for a massive effort on investor education in the interest of the investors and the companies who are doing it right.
Satyam Swaha!!

Tuesday, 6 January 2009

Stimulus package completed?

Remember? I had written about the stimulus package on december 4th. After that I thought that I should take a break in posting data. The entire package came in two stages and now the petrol and diesel prices cut will also come in two phases. Indian polity probably does not believe that the current slowdown is for real therefore the speed of response is that slow.
All through Indian contemporary history economists have derisively chided our economy and called it the hindu rate of growth.
Let us spend some time on this phenomenon of hindu rate of growth.
Indian inaction is legendary by now. Inaction in war, inaction in peace and inaction in strategy. One of our erstwhile Prime Ministers famously quoted "deciding not to do anything is also a decision". Our politicians, most of whom are lawyers are used to biding time and asking for adjournements in courts of law. They bring this innate trait to the governance table and wish away the problems thinking that time is the greatest healer. Since these lawyers are used to asking for time and biding time theie cases and thier governments bide time till the defendant or in this case the economy dies on its own.
Economies do not die as people have their own ingenuity for survival. They somehow survive based on their "jugad" (thats the hindi word for improvisation). This "jugad" keeps the Indian economy from going to the ruins. Since, government is ambivalent about the economy the entrepreneurs themselves find ways to prosper. This leads to slower growth with no incentive to grow faster and farther.
That's why we have the hindu rate of growth. India was pushed by the IMF to liberalise, privatise and globalise its economy as the economy was in trouble, now that the troubles are over and as our ex-FM said "A finance minister of any country would be ready to give his right hand for a slowed down growth of 7% in GDP". Complacency has set in, Government is counting months in power, elections are around the corner and government bides time letting prices to go south (PRICES ARE NOT GOING SOUTH BECAUSE OF SUPPLY AUGMENTATION BUT BECAUSE OF REDUCED CONSUMER CONFIDENCE AND REDUCED EARNINGS) thinking that lower inflation will be good for a return to power for the ruling alliance.
The ruling alliance needs to know that people of India want action not inaction. With the proliferation of communication networks, it is impossible to gag people and run the government on rumour mills and PR programmes. Decisive action is needed and it can only come from men of action. So where are our men of action can anybody stand up to be counted?

Friday, 2 January 2009

New Year New Problems

New year brings along a new list of problems. India has not been able to convince the world that terror perpetrators were from across the border. Even if they were from across the border the world does not believe that India can undertake "surgical strikes". The outfit which claims responsibility for the Mumbai Massacre wants to rename itself and carry on its business as usual. Israel has been better off at bombing and pounding the Gaza strip and trying to decimate the Hamas. No world leader minds it anyway. Can anybody tell us why this ambivalence with India? Indian Politicians cannot take a stand and firmly talk about terrorism and they want to always colour them with a religious tinge. Criminals are criminals and that is their religion, please don't give them a religious name.
Pakistani politicians are one-up on the game of diverting attention and changing the subject if debate. The central subject of terror export was sidelined with the issues of citizenship of the terrorist (I don't know why he is still called a suspect when he was watched live by crores of people committing his crime). Another diversion came from the Indian polity who demanded that a group of 20 people should be handed over to India including people involved in 1993 blasts. This is the undoing of India, our country cannot solve and book a case against bombers for 15 years. The media has access to the alleged Don, bollywood has access and even the police department is believed to have access but our government cannot bring back the alleged Don to India as they have no clue about where he is! Why don't they ask bollywood, or our electronic media?
An interesting case of sentencing a serial killer is a classic example of how our legal system works in India
This man was sentenced to life imprisonment and imposed a fine of Rs.2000. isn't that a petty sum for the seven lives involved? isn't that a petty sum for the three murders he was proved?
Think about it
Happy New year