My reflections at Prabuddha Bharat's STEP 2016

On 24-25 September 2016, Prabuddha Bharat Belagavi had organised a "State of the Nation Conclave 2016" the Conclave was supported by the Visvesvaraya Technological University and Rani Channamma University. The conclave was addressed by renowned speakers and I was also asked to present my reflections on the State of the economy. Below is the text of my reflections at the conclave.

"It is always a feeling of deja vu when you get invited to your home town and are given a chance to address a gathering of delegates in a prestigious conference. I must make it a point to thank Shri L K Havanur, The president of Prabuddha Bharat, Prof Sandeep Nair for thinking about me to be a person of some value to speak to the august audience.

I would  like to place before you my thoughts on three things about the state of the economy.

1. Economic themes post 2014: there is a paradigm shift in the economic themes post 2014 and the new government has been talking about two very important themes;

 

    a. Ease of doing business: we have been doing business, the wrong way for the past 70 years and have been able to bend rules backwards to accomodate our whims and fancies. The times have changed and also the new regulations on GST will change the way we conduct business in the country. whenever you go to the market to buy anything, the regular question asked is whether you want a bill for the transaction, if you want it then you wil have to pay VAT or sales Tax and the price of the product will go up by that extent. This choice is invariably offered by businessmen of all hues and sizes. With the implementation of GST, the question would become redundant as the seller would have already paid his part of the GST and would be eager to recover that amount from the buyer. Hence learning the clean way of doing business becomes more important. this to my mind is the real contribution in ease of doing business. business becomes easy when every body follows the same rules.

 

   b. Make in India: there is a lot to be done in promoting 'Make in India', a lot is being done though, labour laws are being tweaked slowly and surreptiously to make it easy for hiring and firing. But the challenges of Make in India are numerous. One of the biggest challenges is the Prohibitive Land proces and highly complex ownership structure of land holdings. this is one obstacle whcih is going to be diffifcult to remove and make "Make in India" easier.

2. Challenges faced by the government in monitoring the economy:

    a. Collecting economic data is a nightmare for our statiticians. Our IIP data is published three months late, Our inflation data is not relied upon by our own industry people. collecting, collating and computing GDP has become a bone of contention between private data aggregators and the government statitistians. Collecting authentic data in a timely manner is a big challenge for a country whose unorganised economy is larger than the organised economy.

   b. Building and maintaining an organised market for various commodities, products and financial services is another major challenge. creating an ecosystem of organised markets and then collecting and disseminating data are two sides of the same coin.

3. What has changed int he last two and a half years?

       

       a. A very personal example is that I have been asked to be on stage and present my reflections on the state of the economy. The organisers wanted me to talk about my thoughts without asking me about my lineage. This is the biggest change here. Earlier dispensation wanted only those with the right lineage to address gatherings. Being capitalist is no more considered regressive. Still some pockets of the civil (should we call them that) society think that being communist is being progressive. So first victory over the class war has been won by debunking the thought about left leanings being progressive.

     b. We have a government at the centre which has engaged a number of common citizens in a constant dialogue on governance with the help of loca circles and the mygov initiative on the digital platform. I appeal to all of you to please participate on this platform positively and constructively.

    c, Finally you have elected this government in the hope that the government cleans up the house. when you engage somebody to clean your house, remember that the cleaner is bound to reach undr your seat too to get the job done. therefore don't complain that the janitor has reached under your chair too. get up and declare your dirty assets to the government before the cleaner approaches you. these are the last few days available for declaring your black money, make the most of it and declare before the due date.

I would like to end my submission with the following lines

Mera desh badal raha hain, aage badh raha hain.

Thank you"

Budget 2012-13

This year's budget has four points which have caused anxiety.

1. Raising Service tax to 12% and creating a negative list of services. This act of the finance minister has put a plethora of services in the ambit of service tax. Indirect taxation in itself is a very demotivating tax for entrepreneurs. "Value Added Tax" or excise duty are taxes for adding value to the raw material so that the ultimate user of the goods pays for the labour spent on these raw materials. Service tax is also in the same legion, the ultimate consumer of service has to pay tax on the services consumed. The logic being, our government is not able to tax individuals and firms directly, effectively and therefore they would like to recover taxes from them through this roundabout means. The logic may be correct but it is flawed when you calculate the yield.

Imagine a large industrialist who has more than 50% stake in his public limited company, he obviously falls in the 30% + Surcharge category tax slab. If his company has lets assume a payout of Rs. 1 billion as dividend then more than 50% of that money would come straight to the promoter's pocket and that too tax free!

So our friend promoter now file income tax returns claiming tax free income of more than Rs. 500 million and may be a salary of around 20 million rupees. if he pays 33% tax on the 20 million rupees his tax outgo would be 6.66 million rupees and that would be an effective tax rate of 1.2%. what is the amount of money he would be spending on services to pay a service tax is another question. if he spends around 5% of his residual income on services he would be paying a service tax of approximately Rs. 2.5 million. Compare this with the tax he would be paying if dividends were taxed. If dividends were taxed then the tax that this person would be paying would be 30% of Rs. 520 million amounting to Rs. 156 million.

The excuse put forth for not taxing dividend at the hands of the tax payer is that it is very difficult to implement. All we need is to implement it with the big fish and let the small fry go away. A cursory look at the share holding pattern of large companies in India shows that the most of the companies have promoters stakes above 30%. retail investors account for around 5% of the investors in these companies. therefore it is easier to locate the shareholders and demand dividend tax from them in fact with compulsory demat accounts it is still easier for tax collection. Dividend can also be taxed at source like any other TDS and the companies can be asked to deposit the TDS on dividends. That way it would be the most easiest tax to collect. In times of inclusive growth it is blasphemy to let go large industrialists with small effective tax rates.

So instead of taxing people on the services they avail, it would have made great sense to tax dividends and the government could have mopped up more tax from this exercise.

2. Amending tax laws to levy capital gains tax on transactions outside India, when the assets are in India with retrospective effect from 1962 is a RETROGRADE STEP. Any amendment in tax laws should be for the forthcoming year so that the businesses and the people at large take this as a cue and engage in activities knowing fully well about what part of their earnings need to be share with the government. If the government is going to pull out historical deals and ask for a share in the profits earned in earlier periods, this means that the government is going to wait until you make profits and then lay its claim on its share after the game is over. That's not GAME Mr. Finance Minister! Any tax law which proposes to tax income in future is welcome but not past income. Past is Past Pranabda, please make the rules of the game before the game starts, Indian government is known for changing rules of the game midway, but changing the rules after the game is over is obnoxious and not palatable.

3. Fiscal deficit seen at 5.1%. Should we say this is realistic or should we assume that our FM will be off target by 2% like all other FMs in the past. If he is off target by 2% then it would mean a Fiscal deficit of 7% and that would be catastrophic. If he is realistic,  then what happened to the target of 3% fiscal deficit announced in the previous years? Why can't the government cut costs? stop spending on freebies and concentrate on good governance and prudent financial administration? Are coalition pressures stopping the finance minister from taking bold measures like restructuring the tax rates to increase effective taxation rates of wealthy people and reduce the taxation rates of the the lower and middle income groups? World over there is a growing consensus amongst the rich that they are ready to share their wealth but that is not to be seen in India, why? This approach of floundering on the policy front and squandering the fruits of growth in the last decade will slowly and surely take the country to a 1991 like crisis.



Car Sales for the year 2011-12. Source http://www.team-bhp.com/



4. Increase in excise duty on large cars. Whom are you kidding Mr. FM? Even if you consider all cars of C1, C2, D1, D2 and Premium Category as large cars, the number would be @ 720,000 cars per year, an increase of Rs. 50,000 per car amounts to Rs. 36,000,000,000 that is Rs. 3600 cr. I think that's too much ado about nothing. One more tokenism.

Let's talk about the Rajiv Gandhi Equity Savings Scheme. As a stock market practitioner I still have no clue as to how am I going to tell aam aadmi that he should open a demat account and invest Rs. 50,000 in equities locked in for three years and then he would get an income tax benefit. Seems a far fetched idea! Anyway thats our FM for you. 

As far as the markets are concerned, FII liquidity is still chasing Indian equities, since they do not have any other assets elsewhere worth investing. Around 10 bn dollars have already reached the shores of India in this calendar year and these dollars are giving me the jitters that they may fly back the way they came in, SWIFTLY...

Hoping that the FIIs do not find a better place for investment, our markets will surely go up slowly. technically speaking, the 50DMA has crossed over the 200DMA after nearly a year and a half and has given a good bullish signal. I only pray God that these things will keep the market moving northwards despite the wrong economics.

Have a nice Day

Is FDI in Retail the "fix-all" for the Indain economy

The cabinet approved 51% FDI in multi-brand retail in the last week. The rumour mongers and spin doctors of the government have started talking as if they have taken a giant step in the direction of development of Indian Economy.

Lets take a look at what are the fall outs of 51% FDI in multi brand retail. If the larger retailers really warm up to this idea and invest in or country, who will bring in the remaining 49% is the moot question? will it be through equity dilution to the Indian Public? or will the corporate chieftains, known for their hoarding propensity grab up the remaining 49% stake? if the public is allowed/invited to participate through the equity route, it will be a welcome step in making public participation more inclusive, else it will be another of those schemes meant for the rich to be richer and poor to be poorer (this is assuming that the larger retailers will adhere to good corporate responsibility and keep their shareholders interests in mind whence they manage their businesses).

Another major lobby which will benefit from this immensely will be the real estate lobby. People holding (hoarding) large patches of prime real estate will be able to strike highly profitable deals at unrealistic prices and will be able to make more money. The high rents paid for these commercial properties will end up burning a hole in the pockets of the final consumer. No only this, but another interesting thing is panning out in the Indian markets due to these unrealistic property prices and rental rates. Visit any city, you will find hordes of empty commercial spaces in the upper floors of posh building without any tenants. The owners think that they will be able to attract the same rent as building space with frontage and have kept them empty. The rentals of commercial spaces work out to a little over 4% per annum on the investments made. investors in real estate/ commercial properties are still doing it because they think that the loss in rentals will be made up by the capital appreciation. (doesn't this smack of the stock market mentality? unattractive dividends being made up for by the capital appreciation of stocks!)

The question is, is this approach to real estate pricing  correct in the first place? Is real estate the same as stocks? stocks are liquid: real estate takes a long time to liquidate, stocks can be easily transferred: real estate takes an eternity, litigation in stocks is very minuscule: real estate is highly litigative in nature. So many differences can be drawn to elucidate that real estate and stocks are different classes of assets and they have to be valued and treated differently.

The trading community, which relies on the difference between the farmers/producers price and the retail price will be the worst hit in this milieu. The commission agent will lose his relevance once large retails come over. Remember Reliance had started a vendor portal to procure all their SKU's directly from the producers. Disintermediation is a good thing for markets. But, intermediation employs a majority of people in India (with a long history of trading, and a country of traders) the question arises that whether it is prudent to kill the business that Indians are so good at?

I have posed these questions to elicit comments and make this a lively discussion/debate. Please feel free to vent your views on the subject.

Now, for the outlook on the markets: The cheer in the stock market will be short lived as with other bailout measures. the NIFTY is in a secular bearish trend and it will take a big effort to turn the tide.

How to support the fight against Corruption

Let us all pledge to do our bit to free India from the clutches of Corruption and Black Money by taking these simple but very DIFFICULT STEPS

1. Ask for a bill on every purchase and pay the Sales Tax.
2. Give Receipts on every sale and pay the VAT/Sales Tax
3. Declare the correct amount on every sale or purchase of Land and Flat and Pay the registration tax that is applicable.
4. Never demand or pay a cash amount while buying or selling property.
5. Stop bribing the traffic police for traffic violations and pay up the legitimate fines.
6. Register for only one ration card, gas connection and electrical connection.
7. Pay electrical bills on time even for connections of farms.
8. Declare genuine farm income only and not club other incomes as Agricultural income to avoid taxation.
9. Do not pay or receive donations without receipts.
10. Stop acting as though the law is meant for the minions and not for us.
11. Stop running households on expense accounts of businesses. Declare real income from businesses.
12. Stop Bribing people asking for enhanced credit limits/ Loans etc in Banks and financial Institutions
13. Stop asking for kickbacks on commissions on LIC policies, General Insurance Policies, etc.
14. Stop buying Degrees and Diplomas online and apply for jobs with them.
15. Stop asking teachers to give more marks by bribing and coercing them.
16. Start giving receipts for services (especially Doctors): Consultation, Operations, procedures, etc. Other Consultants like Accountants, Tax Consultants, etc.

All these and much more....

Only if we start cleaning up our house and souls then we will be able to clean up the country. Our country is seeped in corruption not because of the politicians and bureaucrats but because, we tolerate corruption, we always believe the laws are for others and not for us. we always want to wipe out corruption but want to get farther by bribing somebody on the way.

THINK ABOUT IT!! IS IT POSSIBLE TO SACRIFICE ALL THIS!!

Hoping for a corruption free India!

wither markets

Let's look at what's the problem with the markets. Nifty went to about 5650 and bounced back today. I think this is just a small bounce. Nifty is headed towards 5500 before it decides which way to go.

In fact, I heard a nice joke the other day. Somebody said that Nifty has made a Ghazini pattern. It forgets where it is going after every fifteen minutes.

There is a lot of bad news for the Nifty to do anything good. Inflation is still very high and we have negative real interest rates in Indian markets. Most of our friends (and experts) expected the dollar to be at Rs.42 by the year 2010 and they even went on TV to boast about it (in fact one very learned "Professor" grilled me hard about this issue when i said that the dollar would reach Rs.48 and of course made fun of me) I only pray to the good lord and ask HIM to forgive the Professor for he knows not what he did:)

With negative interest rates, the FIIs will slowly start realizing that they are not making money anymore and losing due to the depreciating Rupee. I am categorically saying it again that the Rupee is expected to depreciate up to Rs.50 per dollar and you can expect FIIs to take a walk from the Indian markets for a short time.

The reasons for the fall in the markets will be the usual suspects (from the media viewpoint) lukewarm budget, inflation, scams and any other new "NEWS" they can find. but the writing on the wall is very clear. NIFTY at 4900.

India Budget 2009

If there can be a perfect example for a damp squib, this is it! my earlier post I had opened a discussion on the role of media in creating a hype about the union budget and had also mentioned what can be realistic expectation of the new regime.

I was spot-on, in saying that no fireworks could be expected.

Now let see some of the important budget provisions and find out what they mean for you, me and the financial markets.

1. India Infrastructure Finance Corporation Limited (IIFCL) has been granted flexibility in raising finances and lending to infrastructure projects, meaning that it has been left to fend for itself.

2. The allocation for NHAI has been increased by 23%. Good move this would help in the development of national highways.

3. Farmers, the darlings of the politicians (that's not because they are voters but because most of the parliamentarians and politicians are farmers themselves!) have been offered an interest subvention @ 7% and a 1% subsidy for prompt payment (this means the effective borrowing rate fr farmers is 6% and they are not required to pay income tax too). It pays to be a farmer in India.

4. The Market development assistance for exporters in the form of interest subvention on pre-shipment credit extended up to 31st March 2010. Our finance ministry expects the global crisis to blow over by then and then we will be charging the same interest rate for our exporters as other manufacturers.

5. SARAL-2 will be introduced this year. Have you ever heard of a simplified simple tax form. here it is!

6. NREGA the wonder child of Congress (How come the name does not start with Nehru-Gandhi name?) has been allocated Rs.39100 crores (Rs. 391,000,000,000) this year. Lets do a small analysis. NREGA guarantees 100 days of gainful employment for one individual in every household in rural areas and pays Rs. 100 per day per head. This amounts to wages of Rs. 10000 per household for a year. So if Rs.391 billion have to be spent then this money is expected to cater to 39.1 million households, out of approx 197 million households as per the official census of 2001. The corollary of this is that 20% of our population is in abject poverty and is not capable of raising Rs.10000 per household in rural areas. If this is true then Shame on us. If this is not true then, there seems to be a problem with the way our government works.

7. A national mission on women's literacy is being set up and it will help in reducing illiteracy amongst women in the next three years. WOW a commendable job.

8. Students who take loans for education will enjoy a moratorium on interest payments till they finish their course. That is a great thing and it will go a long way in helping poor students to educate themselves.

9. A public Private Partnership is being envisaged in managing the good old employment exchange. That is a great idea, all you private placement consultants and naukri.com better watch out big brother has just entered the fray and he will gobble you up.

10. The Unique Identity Number project has been allotted Rs. 1.2 billion to start its operations. That will kick start the operations but we need more money to count the number of people in this country and provide smart cards for each of them.

11. GROSS FISCAL DEFICIT is expected to be 6.8% of GDP and the Gross State Domestic Product limit has been raised to 4%. Mr. Finance Minister Sir, your targeted Fiscal deficit was 3% and you went on to stretch it to 6.8%. How can you expect your counterparts in the State Governments who take pride in profligacy to contain themselves to 4%?

12. Direct Taxes: Individual Income tax slab at the lowest level has been raised by Rs.10000 for male individuals and women. The lowest slab for senior citizens has been raised to Rs. 240,000, a raise of Rs. 15,000. For the HNIs the surcharge of 10% is abolished. Here the people in the middle tax bracket seem to have got the wrong end of the stick.

13. Fringe Benefit Tax has been abolished. Now your company will allow you to go on tour and spend money and not worry about paying FBT on part of the amount you spent on that junket.

14. Commodities Transaction Tax is abolished. I don't know what to say. the government keeps banning commodities trading whenever it sees a flare-up in commodities prices. So the right question would be which commodity is being allowed to trade right now to understand the impact of abolishing CTT. Any way removing CTT will help commodity exchanges and help stock brokers to start commodity terminals as a hedge against the failing fortunes in the stock broking industry.

15. Minimum Alternative Tax: the MAT under which corporate growth has been swept under by the previous finance minister has just got bigger. MAT has been increased to 15%. There is no incentive for tax management using the growth=depreciation route now. THE SINGLE LARGEST REASON FOR THE STOCK MARKETS TO REACT THE WAY THEY DID IN RESPONSE TO THE BUDGET.

16. Thankfully there have been no major changes in indirect taxes.

17. GST to be operational from 1st April 2010. Good move. GST to be bifurcated to central GST and State GST. BAD MOVE. This means we are going back to the good old days when we had central sales tax and state sales tax. so in Karnataka instead of CST and KST we will have CGST and KGST. (How to share the spoils of the tax revenue amongst the centre and the state could have been kept in wraps and a common GST would have been better)


That's about it. As far as disinvestment is concerned, no specific announcement was made.

Moral of the story: More the things change, more they remain the same. The 1991 wave of reforms was not of Congress manufacturing, but out of compulsion of the IMF. Now that the economy is strong enough to withstand the perils of global financial meltdown we can do it our way, the NEHRUVIAN WAY. In fact, at one time the Finance Minister was singing paeans to Mrs. Indira Gandhi, for having the grand vision of financial crisis 40 years back and resorting to nationalisation of banks.

WOW I am very happy that we had such visionary leaders who could predict turmoils four decades ahead. Our FM needs to read a little of modern economics and find out that this financial crisis happened to US because the Glass Steagall Act was repealed in 1999. There was no way how our Prime Minister could envision that this would happen in 1979.

Now for the markets, the immediate support for the markets is 3800 on the NIFTY. Nifty has to fill the gap it created on that euphoric morning after the budget first. Then lets see if a plunge protection team is formed and whether it works else we will see the October 2008 bottoms again.

New Government Old Politics

I am writing this after a long time. In the meanwhile as the powers that be changed and exchanged their jobs, me too changed the job (you can find out about it on my profile). The last month has proved it again that as more things change, they remain the same. The Loksabha saw the first skirmish of what was to come in the next five years. DMK and UPA do not seem to see eye to eye on the disinvestment issue. That caused the stock markets to lose 500 point on the sensex and gain 450 points in a matter of two days. Now, was this a predetermined trading strategy is any body's guess.

The Nifty has relentlessly gone up from 2550 pre-elections to 4500 post elections and has made a lot of investors richer. What should one make of this near doubling of the nifty? May I remind you of the October lows (i.e. 2008 October). In the last eight months majority of the front line stocks have posted phenomenal returns, Reliance, SBI, RCOM, Reliance Capital, Reliance Infra, Reliance Industrial Infra, Suzlon, the list goes on...

Has the economic outlook changed so drastically that the despair of the markets has gone and the economic boom is right round the corner? Has the global financial crisis blown over? Does a change in the leadership in Government (in this case no change) make such a difference that people will throng to the stock markets and buy whatever comes their way at whatever the price? We have heard that markets are irrational but are they so irrational that they DOUBLE IN EIGHT MONTHS?

Given these circumstances, we can reach to two conclusions.
1. The markets were artificially brought down and a panic situation was artificially created so that gullible people sold out at lower prices. The economic situation had not worsened at all and everybody was crying WOLF.
2. The economic situation has really worsened and there seems to be hope that things will turn around. This hope has made the markets rebound and get ready for scaling new heights. The worst is over and out and things will be great once again. Our PM also corroborates this statement that India has the capacity to grow at 9% p.a. despite the slowing growth world over.

I would like to leave these question open for discussion...

Please feel free to leave your comments at the end of the blog.

TWO CIRCUITS AND A SCAM

The Indian stock markets hit two circuits and were closed for the day. It was an unprecedented thing that happened.

A decisive win for the UPA has brought back the bulls in the market with a long list of wishes.

1. Easing of FDI norms for Insurance sector.
2. Reform in the banking sector (especially on the labour laws side)
3. Disinvestment from public sector undertakings to make up for the deficit brought about from last year's doles.
4. Dismantling of the Administered Pricing mechanism for petroleum products.
5. Easing of interest rates and making credit available to the industry.
6. Boosting exports by implementing a new export promotion policy.
7. Spending more money on health, infrastructure and education.
8. FDI in the aviation sector.

I HAVE ONLY ONE COMMENT TO MAKE FOR ALL THIS WISH LIST. THIS LIST WILL REMAIN A LIST AND YOU WILL PROBABLY BE ABLE TO SEE ONLY 40% OF THIS LIST COMING TRUE IN THE NEXT FIVE YEARS.

AS FAR AS THE MARKETS ARE CONCERNED THE REGULATORS ARE NOT IN SYNCH WITH THE MARKETS AND THEY NEED TO REFORM THE MARKET FIRST. A TRADING OF 300 ODD CRORES CAN STOP THE MARKETS FROM TRADING AND CAUSE A UPPER CIRCUIT. THIS IS THE BIGGEST SCAM OF ALL TIMES AND NEEDS TO BE PROBED.

Additional reading http://www.moneycontrol.com/india/news/market-outlook/nothing-to-be-proud-of-vk-sharma/398047/1

If the market can be easily manipulated with 300 crores then it is a very shallow market. We first need stock market reforms and we need a regulator not an opinion maker in the regulators seat.

All the best.

Foot in the mouth disease affects me

The UPA has won. It just needs either SP or BSP to lend a hand to the HAND. Dr. Singh will be KING again and keep the seat warm for the heir apparent. Now the question shifts to who will handle which portfolio? PC will have to reboot through the Rajya Sabha. Laluji has a strength of TWO so he has no hopes of making it to the cabinet.

What about the markets? Nifty will be on a new Government honeymoon from Monday and will surely scale up to 3950. It faces a technical resistance there (may be the market may not like the new cabinet or the new FM). If this resistance is breached then we can safely assume (FII Gods and world markets willing) to go up to 4250 in this pre-budget rally. By the way, we are in for a fresh budget from the new Government, the February charade was just a vote-on-account. A vote-on-account is just a permission from the outgoing parliament to splurge for three more months.

With fiscal deficit going out of the hands of the government and no new investment forthcoming the new government will have an up hill task of keeping the economy on the growth track. Our banks may not need a stress test but they sure will need some prodding and some loosening of norms for doing their regular job of credit disbursement. Of course they will have to be assured by the new government that the loans they give will not be waived off again and even if they are waived off, they will be compensated fast.

Now you will also see some more woe stories coming from foreign and not so foreign investors about the state of the economy not being conducive for fresh investment. Things like the limits on foreign investment in retail, insurance and MEDIA will be tossed around. These will be bandied around as reasons for the stock markets not performing well.

The MEDIA moguls need a pat on the back with loosening investment norms for all the PR that they have handled splendidly for the first family of India.

This will be the term when Dr. Singh will have to actually demonstrate that the nuke deal will actually fructify into a win-win formula for our country.

If you happen to read my earlier blogs you will notice a sea change in the style of writing. You will find this more blunt and more prophetic (to say the least). That is because, now that I have bungled once on the predictions of the elections results, I have developed a common disease prevalent in the political arena of our country "The Foot in the Mouth disease". Now it doesn't matter if my predictions are right or wrong I was wrong once anyway!

INTERIM... INDIA

We are living history. This must be the only time in the history of India when we have a minister who is PM, FM and External Affairs Minister-all-rolled-into-one. Of course there is supervision by an extra constitutional authority against whom no one in India has the guts to talk. Are we a democracy? are we not a banana republic? are we not a dictatorship? we need to answer these questions as fast as possible if we have to find some semblance of sanity in our country.

Look at the irony of the country, we have a home minister who gives a statement on finance everyday. We have a part time finance minister presenting an interim budget. It cant get any more interim here!

The icing on the cake is the hopes built up by our gullible investors that an part-time finance minister with a mandate to present the interim budget will declare a stimulus package. How can you expect this to happen? The part time finance minister has his hands full in the external affairs ministry as he has to deal with the unprecedented diplomatic offensives from our neighbouring countries.

The election commission was expected to save face by showing readiness to conduct polls as and when the parliament is dissolved or at the end of the term. But internecine rivalry and party politics has also crept into the only non-partisan institution in the country.

The interim budget was, as expected a vote on account to help the government to spend money in the next four months from April 2009 to July 2009 so that the affairs of the state can be carried out smoothly. Expecting too much from this exercise was a wrong thing. As I had written earlier the stock markets would be meandering for a while until the elections. This is the time when the markets will probably bottom out. We can expect the indices to test the October 2008 lows in the meanwhile. The fourth quarter results, annual results and the results of the general elections will help the pessimistic sentiment further.

As far as the expectations of the results of the general elections go, I believe that we will see a completely fractured mandate and we would have a government which would bring in strange partners together and a coalition of opposite ideologies would be in power in for the next eighteen months at least. This period of "interim government" is going to continue for another 18 months now. Unless growth slows down to the "Hindu growth rate" or India heads towards a recession don't expect fireworks in the political arena nor the economic arena. Babus will continue to run the show and ensure that we slip into inactive mode.

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?

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.

China Shows the way

Lord Maynard Keynes must be a very happy man today and must be celebrating in his grave. The Chinese Government has toed his line and announced a $586 billion revival package, most of it is the promise to build infrastructure. This was what was expected of Indian Government too. But our policy makers are busy playing in the money markets. They huddle together for days and come up with damp squibs of reduced interest rates, reduced CRR and SLR. The fiscal deficit be damned, this is the time to act and push for higher government spending in infrastructure, housing, irrigation, power, water and so on.
The government should take a cue from the Chinese government and start a resurgent India programme of stimulating investment. We cannot tamely sit back and murmur about slowing growth, we have to do something ourselves and cannot expect FDI to walk in into India. Unless government starts investing private investors will not bring money to the table. This is a blackjack game where the house has to deal first and put money on the table, unless the players are convinced about money available to be won they will not play. That sums up the need for creation of investment climate in the country.

Information processing speed is the key!

One of the major shortcomings of economy management is the speed and method employed in data collection by various agencies of the government. Today, the IIP number for September were announced, which showed a growth of 5.1% in the core sectors in September!. my only objection is that with the turmoil in October and the pace of disintegration of financial markets and financial institutions, do these number carry any weight? don't we have a mechanism to find out ground realities on "Ground Zero" on a real time basis?
For example steel prices declined by 30% in the month of October (This information is from the market and not from a government source and we are on 8th of November) if this information is available to an individual like me in a remote town in India, why is it not available to Government data collectors?
Iron ore prices have crashed starting from September through October and it is common knowledge in mining areas that iron ore miners, transporters and traders are in dire straits, does this information reach the government or it will reach when one of the transporters, traders commits suicide or one big timer goes bankrupt?
Tata Motors and Ashok Leyland have cut production of commercial vehicles as thousands of HCVs are lined up in the second hand market. A result of ore transporters losing business completely. Does this reflect in the statistics of the Government now or will it reflect only in December 2008 or January 2009. Would it be any useful to the policy makers or the public to know this after most of the single truck owners have defaulted on their loan payments and their trucks confiscated?
There is an immediate need to tone up the information gathering process and make it real time. In this era of IT and e-governance this is the least our government can do, more so, when we proclaim to be the World leaders in Information Technology.