Thursday, February 19, 2009
Post the beginning of the economic crisis, most have blamed the Govt. for reacting very late. People have opined about how complacent the current administration has been in averting the present crisis and how late they were in taking steps to curtail the ramifications.
I am not a fan of this present Govt. , only of few individuals just like any other administrations in the past. But wonder what the govt. could do in order to avert this crisis. I do think govts. are complacent but to me the criticism otherwise is placed i.e. about the role of the govt.
Few Arguments made by those who criticise the govt.
1. They brought down interest rates very late: In Mid 2005-06 when credit was growing at 23% Kamath and his tribe wanted it head south as the India growth story would be over cause of dearer funding. RBI was criticised throughout 2007 when interest rates were rising. Various banks had criticised RBI on the grounds that several new and cheaper channels of funding emerged(PE,VC Equities etc.) especially to Realty. In hindsight we see wisdom of having been conservative with our credit. To me the central bank is the best judge of when interest rates need to be brought down.
Whether or not Interest rates were brought down late is very subjective cause the important point is of them being effective. Obviously interest rates need to be brought down slowly and in a cordial manner.
Interest rates are down today. Has the demand situation reversed? A resounding no. The demand destruction post the excess supply was bound to happen and interest rates rather the reduction of it wouldn't have helped one bit. In fact in hindsight seem prudent. If banks had relatively cheaper credit available it would have entered a system that was still running at high prices. In layman's terms- Funding Jag purchase by the Tata's at a high price would have created another cycle of problems of credit. The need to fund the deal obviously is no reason for credit to become cheaper.
2. Policy Changes were inadequate: What policy could have reversed the dismal situation that textiles and gems and jewellery segment were in as the problem with these sectors was with the huge demand fall in target markets. What impact would zero export duty have when there in no importer ready to buy abroad. The fact is the policy would have been ineffective to curb demand fall abroad.
When banks are collapsing abroad what policy would have helped the IT sector where BFSI account for 40% of India's IT revenues.
3. Oil prices were brought down very late: Again don't think govt is at fault here. There were two Strong reasons- One is of the previous losses that had to be recovered and to get some cash in the balance sheet of these companies so that they don't cry "Oil Bonds Please" later. And mind you Oil bonds contribute to inflation again instead of bring it down. Second is of the depreciating currency. If one denies the impact of the currency then one is undermining it's role. Inflation control that was achieved during the appreciating rupee would have the opposite one during a cheaper rupee.
4. Tax rates should have been cut: Look dude to pay taxes you need income, you need profits. What taxes are you gonna pay when both don't exist? Yup the previous argument seems valid. But the fact is that if one wanted economic activity it is imperative that one spends. It's important that money flow improves which yes could happen by reducing tax rates and leaving more money in the hands of the consumer. Probably the govt. is at fault here. But given the levels of fiscal deficit, the farm loan waiver, the 6th pay commission I guess I would have a be a real tough nut to implement this measure.
In a nutshell, even if the govt wanted to and was not complacent as said to be in some quarters they role would have been insignificant given the fact that the excess supply and over heated demand had to correct severely.
Thursday, February 12, 2009
Most of us have at some point or another opined on how the West rather the U.S. with its barrage of Capitalist posterboys have been icons our Indian Counterparts are expected to follow. How at several points we've been told that accountability and corporate governance of the west is something for people closer home need to emulate.Corporate Governance from the West???
Subprime mess to many would require no introduction. Today TOI reported that a U.S. citizen killed self and family as a consequnce of the Job losses. The whole world is in a tailspin. Noone is sure, secure about tomorow. Each passing day throws some bad news about the economy.And then you have the best news of all.
In one of the worst crisis to ever hit the world in the past 30 years we have Merril Lynch's Former Ceo, John Thain spend $35,000 on a commode. i.e. Rs 17,50,000. Quite an expensive potty!!!He had $1.2 Million spent to renovate his new office. Probably use the new environment to cope with an economic one never seen before. That's Rs 6 cr just on renovation. All this at company expenses.The audacity of bank bosses is quite commendable. You have governments who are injecting billions into the economy by buying bad assets, create jobs and revive demand in various sectors. Indirectly it's revived surely in one sector- Sanitaryware.
This lavish over the top expenditure has come at a time when the U.S. Banks are reeling under pressure, thristy for funds. At a time later when Merrill was sold out to Bank of America just to keep it afloat. At a time when the world is screaming credit crunch, at a time when there's no Lehman brothers, no jobs, John Thain flushes down in style!You then had beggars actually come in corporate jets. Remember the General Motors Ceo and his kin flying down to ask the govt. for funds. It took some public criticism to actually get them to come in Cars that to Hybrid ones!!!Now you have Citigroup that needs to be told by the U.S. Goverment to cancel a purchase of a Corporate Jet.I'm not sure whether these bosses will ever learn. The've ensured a safe landing for each one of them.
Merrill paid $4 billion as bonuses when the company actually incurred a $ 20 billion loss. Surely they deserved it!!!Richard Fuld escaped with his millions, Stanely O'neal went out on a neat pay. So where's the accountability in a country which preaches about capitalism and all its goods, about how the markets punishes non- performers and rewards only success. The $ 4 billion bonus payout surely wasn't rewarding success.....
Post 26/11 MTV’s news bite program, MTV Wassup had carried pictures of Shivraj Patil and Mamta Banerjee. The take was to identify who the politicians were and whether "youngistaan" could identify those individuals. None had.The youth or people they interviewed would have known shivraj patil, given 26/11. Post Nano debacle Mamta surely would have been known to the yuppie ever criticising junta.
This is our youth, it's us, that blame politicians for everything that goes wrong but isn't aware of the names of the politicians. This is that section of the youth that would shoot smart slogans against politicians without knowing their namesOne can be excused of not knowing who Kamal Nath is or for that matter AK Anthony. But obviously these individuals are not sure whose responsible for internal security. Given that serial blasts in various cities and the "cribbing" that we all get involved in surely at some point they informed you on who shivraj Patil is. Given the fact that we complain of not enough jobs, investment and growth surely Mamta Banerjee would have been known. I guess the problem lies in sterotyping. Mamta Banerjee was passed of as Rabri devi!! Cheers to the youth.
Would it make any difference if these names were known to the youth? A resounding No. But there's a larger issue at stake. Awareness!
It's human tendency to always find fault with someone else for our failures. We loathe everything about politics not cause of necessarily of an informed view but a cynical "herd mentality".
There's a another equally passionate section that opines of us being responsible cause we don't vote and therefore don't make any difference. To me that's illogical. You could make a difference through your vote only if it's excercised through an informed view. And not just cause you have to “vote” and the jingoism surrounding "it's our responsibility to make a difference….we must vote".
The basic point I'm making here is that awareness of politics would be improve one's view point of it but obviously is required for better assessment of politics.Another classical sterotyping - Rural voters are swayed by politicians based on caste and creed. So it's an informed choice that they make. Also there are poor, illiterate and uneducated and therefore get swayed by politicians.
This to me is hypocrisy of the urban junkie at it's best.It's the same disdain we show towards the "bihari" with his strong rural accents who possibly end up cracking IIT's and IAS's v/s a call center exec with his imported dialect who probably can't spell "que".Other problem of politicians being corrupt. To me it's the system inefficiencies that are to blame of which we are a part of.
Surely Arun Jaitley, Kapil Sibal, PC, Ravi Shankar, Mani Shankar, Suresh Prabhu, ain't your usual Corrupt Brigade. Yup the problem lies in branding each one as another Amar Singh or a Pappu Yadav.
Why are politicians expected to uphold values which we've long lost?
The glasshouse corporate world is filled with individuals who would ate the slightest instance chose self-interest over a societal benefit. Who would expect tax benefits and exmptions for themselves but a loan waiver ends up in a hue and cry.
In a nutshell, don’t' think that awareness of politics would change ones' perception of it but surely awareness and following politics would go a long way in assessing it's failures.
Wednesday, February 11, 2009
Inflation is unfortunately a necessary evil. We hate the fact that prices soar but ignore the increase in incomes that go along with it. It's obvious, as closer to the equilibrium point, increase in prices means more incomes in the hands of factors that enter production.
In short: Prices need to rise. It's only when prices rise, is there an incentive to sell. When there is an incentive to sell will suppliers of goods and services deploy more capital and resources. This increases the factor incomes at the resources end which then creates demand for other services. And like a magic wand that increased prices eventually lead to your increased income.
So if prices drop you may be happy but good chance that you income would never increase.
So mama, just relax, you need inflation and it's important.
The current crisis has thrown it's fair share of benefits. The most important of all is Risk Assessment. Not the risks not associated with Asset prices, credit etc.
It's led to a re-assessment amongst individuals, amongst my generation that had it fairly good. To whom the word "savings" seemed a euphemism. During my initial stints post college I wondered how certain expenditures were tolerated amongst our circles given the fact that our incomes were the same. Individuals who would earn Rs 15,000 pm but own a Rs 20,000 cell phone. As for me Rs 20,000 meant several months of fixed expenditure on phone bills, maintenance, food bills, investments(and the losses that come with it). Most were passive about these concerns.
Savings were never a concern. Expenditure and life on plastic was a norm.
The worst hit in the re-assessment are those in the ITES sector especially one in BPO's. Jobs are at stake everywhere. The problem lies more with the adjustment to lifestyle changes. To me it's good as a sense of arrogance and nonchalance has slowly made way for humility.
The Crisis has restored some Sanity. Extravagance is out, and rationality is in. A rude awakening to the Batmen, as I call them (given that they work only at night). A lifestyle that's lived on leverage, on excesses. The tunes Rock On! have been silenced to some meditative ones to cope with the crisis.
Most have gone back to basics. PSU's have emerged are the most sought after recruiters today. Here the point is not about whether PSU's are better at utilising the resources as compared to their Private counterparts. The larger point is about traditional sectors or what is otherwise known as Old-Economy seeing some talent inflow albeit temporary. Heavy engineering and FMCG are other neglected sectors that have seen interest.
Economies Re-align as they grow so it's always a good chance that manufacturing may not remain so hot. In India its the services sector that has propelled growth. And unlike in the past where it was imperative to have a dominant industrial base that theory will not hold longer.
Industrial revolution was built on the fact that it created huge employment which means money went into the pockets of consumer. Today most manufacturing is automated and is more capital intensive than labour. So services substitute the role of spurring growth as they generate substantial employment. And the services then create their own set of implicit demands.
The problems with the IT sector should be seen as a blessing in disguise. Yup I'm all for labour to be determined by market forces than national service. But found it terrible that Aeronautical engineers landed up at Oracle. Metallurgy grads were mining software systems and best of all, was the telecom lot that was actually attending calls.
Most countries in the past or that have been historically power full have always been superior in technology, in indigenous science. Be it the Romans, Russians and present day US. Technology and the incentive towards research is an important factor in any nation's development. And yes quality of labour force at the right places and to incentivize them is crucial.
In this era where probably 3 years of economic growth has been lost. It's pays to invest to the basic sectors such as science and infrastructure. Not in education. I'll tackle it later.
Second it also opens up issue on FDI. I'm not a communist but surely capital flow theories that are essentailly decided by John Thain and his kin need to be seen carefully. The stability of banks for ex. is a crucial point. In India thankfully PSU banks or our banking system is a trusted source. Therefore it would pay that banks end up being just what they are..banks!!! Any leverage towards areas such a private equity should be completely de-risked.
So the whole world is in a tailspin now. Products created by Quant geniuses who are bad with numbers, MBA's who haven't got their basic economics right, analyst's that predict earnings of others but are not sure whether their own company can survive the downturn. I actually wonder what right does Merrill, Lehman and Morgan have to rate any company. I once told a good friend that Morgan De-rated x company on liquidity issues. He reply was to ask whether Morgan had any idea about their own companies states of affairs.
If PWC messed up with Satyam's audits and issues a more bizarre statement that it's audits cannot be relied on, we all question it's right to audit the books of any company. Don't we?
The point I am getting here to about selling. Various theories have been purported about what led to this credit crisis. The two main points
1. Interest Rates: Obviously easy liquidity and interest rates fuelled the credit bubble along with accompanying surge in Real Estate prices. If interest rates and easing liquidity could propel growth Japan wouldn't have been in a prolonged recession. So don't think interest rates are so much at fault.
2. Complex Instruments: Some have credited it to the complex instruments(CDS's, CDO's) created arrogant newbie "foreign educated" junkies. I don't think so. It's reported that of huge portion of the credit off take was towards people who couldn't afford.
From CNN -
"For instance, in both 2006 and 2007, well over 40 percent of sub prime borrowers were awarded mortgages with either little or no documentation of their ability to pay. With these so-called "liar loans," borrowers did not have to show proof of either earnings or assets."
These problems could happen without these derivatives. In early 90's Indian banks were running huge NPAs. Bank of India had a NPA of 10%. These derivatives didn't exist. The indian banking system especially some large private sector ones run the risk of huge NPAs without having any exposure to Credit derivatives.
To me essentially the problem lies with "Selling". Selling products individuals don't understand, selling theories/opinions that lack basic foundation of reasoning and understanding of financial products and on which risk mechanism evolve. And also the drive for what looks good instead of how reliable it is.
To cut a long story short, - Been reading bloom berg.com and its cousins for the past 2 years and the Eco times for the past 8 years. The quality of opinion closer is far better and superior than Uncle Sam's prodigy. It's kinda like the difference between the suave sophisticated suit wearing investment banker and the very orthodox and conventional Venkateswar,Krishnmurthy, Subramanium types who to me are the best to listen to when it comes to economics. Ask an tie-wearing ICICI salesman on how Fiscal Deficit is linked to inflation and new theories would be sold and sold convincingly. Forget the good ol school classic economics.
Contd to post 2