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Archive for the ‘Business’ Category

The price of democracy

beggar

Prof. Ashutosh Varshney of Brown University calls India an improbable democracy — poor, impossibly heterogeneous and multicultural, and ironically, only its colonial heritage keeps it going. So has our hubris cost us plenty?

Why we are not China

Forget comparing ourselves with China today. Are we at least on the same path? No, we are not. Assume a lag of a decade between China’s 1979 takeoff — Deng Xiaoping’s reforms — and India post-liberalisation in 1991. Second, assume that GDP growth is a decent proxy for national effort. Judging by the results, we have tried only one-third as hard as China to grow three decades into the reform process. Have we been tied down, like Gulliver, by democracy’s Lilliputian ropes?

Money or efficiency make the world go around

There are only two ways of increasing growth. Increase investment or increase the efficiency with which capital is used. The latter is tough but critical. Efficiency and stability invite foreign capital in, build supply chains and boost “federated” exports — many economies get a say and a share in the final product. Making the world your shareholder makes politicians more responsible — barring outliers like US President Donald Trump — and who knows, his unorthodoxy might well work for the United States.

Wasting scarce capital

Amravati

India is hugely capital starved. Sadly, it has not done well either in using capital efficiently. And it is not just the public sector alone which is wasteful. A generalised trend of wastefulness springs from poor monitoring systems available to the government, shareholders and citizens, none of which can easily check the data by triangulating information sources.

Over-designed public projects

Bengaluru airport has had charging points in its parking lot since 2008 for electric cars, which will not use them till 2030 – if then. You pay for casually over designed projects. The building of Amravati, the new capital of Andhra Pradesh, represents all that is wrong with our democracy with politicians free riding on tax payers.

Frank admissions of failure are as important as bragging about success

Finance secretary Hasmukh Adhia has admitted that the GST network has failed to provide end-to-end digitisation. We knew this. But speaking honestly and responsibly endeared him to the public. Unfortunately, no one is to be held accountable for this glitch.

Adhia

Cheap finance induces waste

Wasteful use of capital is hardwired into a system which prices capital cheaply. Most business folk will moan about the high cost of funds in India. But the fortunes, domestic and overseas troves of real estate barons and industrial tycoons were built on negative interest rates, with inflation boosting prices but diluting the real interest cost of a bank loan to zero over a 10-year period.

Four matras for democratic success 

Can we take remedial measures? The times are tough. But bad times never last. More important, are we primed to take advantage of the next uptick cycle in world economic growth? Possibly not. Here is a four-point mantra for getting there.

Efficient public services

online

First, the new national government, later this year or in early 2019, must tackle the long-ignored task of public sector reform. It is shocking that economic duality has widened since 1947. The average citizen and business is streets ahead of the government in the effective use of 21st century technology to make employees accountable. Can you imagine how the government would change if the bottom five per cent of employees were sacked every year for poor performance or if the courts disposed of cases quickly? Just focusing on achieving these two and keeping everything else on hold could retrieve democracy in India.

Make data accessible on citizen aspirations & preferences, government performance and business governance 

Second, know your citizens. Make all residents and citizens identifiable, traceable and accessible. Aadhaar is the answer. Make registration for Aadhaar painless and self-declaratory — the ability to cancel out duplicates is supposed to be built into the system — enhance its accuracy in identification; mask the private information better and multiply improved digital recognition equipment. Populate data for citizenship, electoral rights and public benefits, using Aadhaar as the base platform. Transfer all public benefits through bank accounts. Roster all government officials, below 40 years of age, irrespective of grade or cadre, to serve as field-level facilitators wherever they are posted, with specific mentoring targets, to help citizens access their benefits.

The BJP and some regional parties (Trinamul Congress, AIADMK, the Left parties) who have a cadre are ramping up to do this. Down this route lies the threat of democratic abdication. A citizen must be served by the government of the day, not tied to the apron strings of a particular party for accessing benefits.

Link official accountability with efficiency in use of capital 

Third, change public incentives and processes. Switch from lazy budgeting of inputs to specific outputs, achievable over two years and outcomes over five years. Form teams of specifically identified officials to programmes and projects; ensure that there are no transfers and the team remains intact for the next five to 10 years. This will ensure more responsible budgeting; development of job commitment and expertise and improve outcomes. China does not shuffle its officials about needlessly. They stay tied to specific tasks for long periods — many forever. We encourage our officials to forum-shop from one cushy position to another.

Stop fiddling with markets

markets

Fourth, walk the talk. Withdraw the government from being a market participant and it will work better. Markets are like forests. Naturalists like Pradeep Krishen say it is enough to fence barren land off from predators like goats to allow a forest to regenerate. Going with the grain of nature doubles results. Anything else is wasteful and inefficient.

Stop fiddling with markets and they will find their level. Focus on diluting, not alleviating, the pain of those who lose out from markets. Just that can consume all of the government. Do not dilute the bite of markets if you aim for efficiency. Equity initiatives must be front-loaded to enhance competitiveness, not installed at the end of pipe to shackle markets. Caste-based reservations for education, jobs or benefits are an end-of-the-pipe option. They gel perfectly with our real strategy of steady but inefficient, slow growth.

Democracy is not the reason for our woes. It is what we do with it that’s troubling. Democracy implies at least a 50 per cent chance of not getting re-elected. The great Mughals would not have approved of the risk profile. Neither, it seems, do our rulers today.

Adapted from the author’s opinion piece in The Asian Age, July 9, 2018 http://www.asianage.com/opinion/columnists/090718/price-of-democracy-a-4-point-growth-mantra.html

Book Review: Paying the price for aid

AID

Three themes undergird the author’s exhaustive narrative of the politics around foreign aid in India between 1950 and 1975, during the early years of the Cold War — the people who made key decisions; the domestic context and, finally, the geopolitical incentives that shaped donor responses.

The deal makers

come across as being surprisingly entrepreneurial in securing aid. Mercifully, unlike more recently, the political and bureaucratic manoeuvring was almost never for personal gain, other than managerial satisfaction at seeing pet projects fructify.

lobbied for civilian atomic power at a time when hydro and coal-based power was the norm. P C Mahalanobis, a physicist turned statistician, institutionalised centralised planning as a scientific prerequisite for development. C Subramaniam as minister for food ushered in higher agricultural productivity via the Green Revolution. Morarji Desai as finance minister and later prime minister promoted private Indian industry and trade, an outlier view, supported by G D Birla. B K Nehru — India’s economic ambassador to the US; John Mathai and later C D Deshmukh as finance minister, economist I G Patel and L K Jha as ambassador in Washington were more inclined to look to markets, international trade, the private sector and the criticality of macro-economic stability, all of which aligned more with the United States as a development model.

Jawaharlal Nehru and later Indira Gandhi as prime minister; Krishna Menon as defence minister, Sarvepalli Radhakrishnan and later D P Dhar, ambassadors to Moscow; Gulazarilal Nanda, deputy chairperson of the Planning Commission; K D Malaviya, petroleum minister; P N Haksar, principal secretary to Prime Minister Indira Gandhi and later deputy chairperson of the Planning Commission and T N Kaul as foreign secretary were the top decision makers who leant towards the Soviet Union.

The domestic context

But individuals became important only because they seized the moment in a given context. Nehru was opposed to be seen begging for aid. It did not fit with his ideology of non-alignment. But India needed lots of aid. With overt political alignment unacceptable, the second-best option for officials was to conspire and reassure donors, that India’s and their interests were aligned.

America feeds India

The establishment of the Peoples Republic of China in 1949 spurred America to save India from Communism. American aid funded technical assistance, community development, large irrigation and flood control projects like the Damodar Valley Corporation and credit lines for the import of machinery by private industries. The PL-480 programme, starting in 1960, provided desperately needed food grains against deferred payments in rupees. The accumulated amount equalled 40 per cent of the money supply by 1974. The US government generously wrote the largest cheque ever, of $2.05 billion, converting two thirds of the outstanding balance into a grant for India.

But disjointed Geopolitical compulsions act as spoilers

But the Indo-American relationship was an uneasy fit. The 1954 treaty of mutual security between the US and Pakistan was an early spoiler. India’s denial of an endorsement for US military action in Korea and later, in Vietnam, rankled. By 1969, interest in India waned, as President Nixon focused on resetting relations with China. In 1966, India accounted for one-eighth of total American aid. By 1975 it had dwindled to one-eightieth.

Soviet Union industrializes India hoping to strengthen Indian Socialism

Soviet aid comprised projects to build industrial capacity. This fitted Indian objectives of backward area development via the creation of model public sector factories in the “core” areas according to the 1956 Industrial Policy. By the 1970s, Indian industry had caught up, whilst the Soviet Union had fallen behind in technology and run out of revolutionary fervour. Meanwhile, enhanced multilateral, soft credit from the World Bank under Robert McNamara introduced new options to source industrial equipment commercially and competitively.

The West – aligned with fPakistan, wary of China and needing its buying power –  fails to provide arms to India 

The United Kingdom, the ex-colonial power, was best placed to meet India’s defence needs. But it was unwilling to supply arms against rupee payments. Military aid from the US for India was a non-starter, given that Pakistan was a close ally. The 1965 Indo-Pakistan war did not help. In 1971 the US-China détente prompted Henry Kissinger, secretary of state, to convey that America would not come to India’s assistance, against a Chinese attack, in response to India’s military action in Bangladesh. In comparison, the Soviets were generous – supplying military assets more modern that those supplied to China; readily accepting technology transfer and payment in Indian rupees. Consequently, the Indo-Soviet defence partnership has endured.

An informative, closely referenced read for diligent students of South Asian political economy, the author posits that India paid a price for foreign aid, which subverted indigenous institutions of collective decision-making, like the Planning Commission and the Cabinet. This assessment seems overblown. Institutions evolve and adapt. Their efficiency must be measured from real outcomes, not the stated objectives or the rigidity of the institutional framework.

The race towards assured mutual destruction in South Asia was fueled by competitive arms aid but civilian aid strengthened India

However, unregulated military aid has sparked off an arms race and contributes massively to the regional welfare loss from insecurity and high defence spend. But just as surely, civilian aid cushioned the negative impact of natural and economic shocks, boosted infrastructure and enhanced human development — all of which helped preserve the integrity of India’s nascent democracy. Individual, institutional or national egos were bruised in the process. In hindsight, that is a small price to pay, for what is today a sustainable and increasingly equitable, growing economy.

Adapted from the authors book review in Business Standard, May 23, 2018 http://www.business-standard.com/article/beyond-business/paying-the-price-for-foreign-aid-118052200013_1.html

Are Marwaris taking over our heritage monuments?

Red fort

Someone else, better equipped and trained should do this routinely


Somebody needs to fund heritage preservation. Why not the Marwaris and Banias? After all they funded the National Movement for Independence. But try telling India’s die hard, Left Liberal crowd that a person in desperate need of a public toilet, does not care, whether the plaque above it gives credit to a public-sector company or a private entity. An especially abled person, with a yen for travel, couldn’t give two-hoots who paid for the ramp that makes heritage monuments accessible on her wheel chair.

None of this will wash with those who hold public management of “national” monuments and public sector white elephants dear to their heart. They would rather see them collapse, gradually, than hand them over to the private sector for making them user friendly.

Our heritage, our identity

Last year, in September, the government launched, what should have been an innocuous and much needed initiative to seek non-state (private) interest in providing better facilities at our heritage sites in exchange for on-site advertising. This is explicitly not a revenue generating partnership. No additional fee or charge, unless approved specifically by the government, is to be imposed by the non-state partner.

ex-IAS, Minister Alphons, off to a good start

Things moved surprisingly fast after ex-IAS KJ Alphons got elected to the Rajya Sabha from the BJP and joined the government as minister for tourism. Thirty-one entities have been shortlisted to “adopt” 95 monuments and sites across India.

These entities called “Monument Mitra (friends)” are required to prepare a vision document detailing what needs to be done to improve the visitor experience and how they would go about doing it, as a part of their corporate social responsibility (CSR).

The good news is that, this time around the public-sector has been spared the near compulsory burden of footing the bill. Most of the interested entities are private companies except NBCC (India) ltd. – a construction PSU for the Old Fort, New Delhi and the State Bank of India Foundation for the Jantar Mantar complex, New Delhi.

Dalmia Bharat Ltd for the Red Fort

But the selection which grabbed the headlines was the one signed with Dalmia Bharat Limited for the Red Fort in Delhi. Left Liberal sentiment was outraged at this seeming mortgage of India’s iconic heritage fort, to the Dalmia’s – an old Calcutta/Delhi based family business.

It is unclear, why the Dalmias are interested in the project, except to generate goodwill with the government and amongst citizens in their home city. The potential for getting a free Dalmia promo in the national TV reportage of the annual Independence Day spectacle at the Red Fort on August 15, might have also been a motivator.

Keeping art and heritage “aficionados” out of the process, generates suspicion

The vision document or the MOU, spelling out what the company intends to do has not been publicly shared. The Committees reviewing the expressions of interest; the vision documents and approving the MOUs consist only of the relevant government departments, to the exclusion of non-state actors, particularly from the extended arts, architecture and culture community in Delhi.

As expected, exclusion breeds unnecessary suspicion and distrust. The Modi government seems to shy away from the active participation of non- state actors in decision making. The previous government of Sonia Gandhi-Manmohan Singh went overboard in the other direction, possibly to deflect any blame from itself. A healthy balance between the two extremes would help.

The Dalmias – hard nosed businessmen, far from the sensibilities of culture.

Ramkrishna Dalmia, a Marwari from Rohtak, was the founder of the Dalmia group. Thomas Timberg notes in – “The Marwaris” that, like all entrepreneurs of the early 1900s he made his money from speculation in silver and then went on to become one of the three largest Indian industrialists along with Tata and Birla. But unlike the other two groups, the fortunes of the Dalmia’s have waned.

Dalmia Bharat Cement is a listed company with a market cap of just around Rs 220 billion – around one half of the smallest 100 top listed BSE companies. Its CSR focus is on energy conservation, rural development and solar power applications. Providing and managing visitor facilities for a significant historical monument is a significant departure from its main line of business. Of course, that is no reason to dismiss the effort outright. But it does raise doubts about their ability to perform, to satisfaction, even if the intent is genuine.

Not too many private takers for cultural spend

Government argues that corporates are not exactly lining up to spend scarce money on historical monuments. They must make do with those who are interested, even if they will have a steep learning curve. Mechanisms for technical support to the Monument Mitra and oversight of their activities, are being put in place. Cultural czars however, thumb their noses at such amateurish attempts to break into the rarified world of culture, art and heritage architecture.

To be fair to the government, not all selections, have the same problem. The well-known Aga Khan Trust – which restored Humayun’s Tomb in New Delhi, has been selected for the Aga Khan Palace in Pune; The premier hotel chain ITC and a GMR entity (builders of the Delhi airport) have been selected for the Taj Mahal and so on.
Dalmia Bharat Limited – a cement manufacturer and infrastructure developer – is an outlier for the Red Fort. One wonders why the government does not share the rationale on which the decision was made with interested citizens. This would allay fears.

Marwaris

Suspicion of the Bania (India’s mercantile caste) is deeply imbedded in the Indian psyche, possibly anachronistically. Even the Marwaris and Banias might have moved on from the rapacious image that Left Liberals have of them. We shall know soon enough. By Independence Day, August 15, 2018.

Also available at TOI Blogs https://blogs.timesofindia.indiatimes.com/opinion-india/are-marwaris-taking-over-our-national-heritage/

 

 

An “Ambassador” amongst “box wallahs”

Rasgotra

Maharajakrishna Rasgotra, India’s foreign secretary from 1982 to 1985, records that in 1948, contrary to the popular perception, the wealthy “Doon School wallahs” preferred to join the domestic services, where they could keep an eye on their assets, and that the IFS boys were at a premium only amongst the urbanised, “sophisticated girls of marriageable age and their even more pretentious socialite mothers”! Things have changed considerably since then. Ambitious Indian girls and boys now routinely choose to work and live abroad, on their own steam, rather than as “diplomatic baggage”.

But true to nature’s rule, when one door shuts, another inevitably opens. Losing out in the marriage market place has been compensated now for the IFS by  major Indian corporates wooing them post-retirement. Just-retired foreign secretary S. Jaishankar has been picked up by the Tatas to head the group’s  overseas operations, reporting to Mr N. Chandrasekharan, the executive chair of the board of Tata Sons, the holding company of all Tata enterprises. The board already has two retired civil servants — Ronen Sen, a ex-IFS officer and former ambassador to Washington, and Vijay Singh, an ex-IAS officer who served as defence secretary. But unlike these board level directors, Mr S. Jaishankar will be more substantively involved, with a hands-on role, as the President of a business vertical. “Descent from heaven” is how Japanese business describes the practice of absorbing retiring senior bureaucrats, who have held key positions, to cushion them from a hard landing in the real world.

Jaishanker Modi

Mr S. Jaishankar is reported to have said he was happy to join “the Tata Group… India’s most respected brand globally”. Just this simple endorsement of the Tata business leadership, from a recently retired foreign secretary, who was selected personally (unusually) by Prime Minister Narendra Modi in 2015, to replace a serving foreign secretary, Sujata Singh, is sufficient to justify the Rs 6 crores that he is speculated to be paid per year. As far as value for money in advertising goes, it can’t get any better for the Tatas.

Despite the 1991 liberalization, Indian business remains constrained by red tape at home. Overseas, it is an orphan, with little formal support from its home government. Blame our perverted colonial legacy for this. The British came to India to trade, profit, export and rule. They used every trick in their mercantilist book of “free trade”, including the selective use of state power and the law, to benefit British companies. But, in a classically hypocritical stance — which incidentally appealed greatly to the convoluted sensibilities of upper-caste Indians, the average British officer feigned a horror of being in bed with business interests. The “boxwallah” was an inferior being as compared to his Army or civil service brethren, who were on a morally superior mission of civilizing India.

Colonial hypocrisy persists – “it is not the business of government to help business”

This “red line” between government and business, which Free India inherited, though always surreptitiously porous, has long since dissolved for India’s domestic service cadres — except for odd cases of the most particular officers. The foreign service, however, has taken to these new commercial roles, over the past decade, as the overseas business interests of private Indian corporates have expanded. This is a welcome outcome of liberalization.

Talk of being a market-led economy is hollow, unless the government works actively to grow the Indian private sector at home and abroad. At the most minimal level, this involves opening doors abroad for our businessmen. This is what retired IAS or revenue service officers having been doing for business interests, at home. But opening doors is low-level stuff, albeit with high personal returns. More potentially transformative, is the opportunity to develop an institutionalized public-private partnership, around the human resources required, by “India Unlimited” to become an A-level international player.

Big is not beautiful

With 162 missions overseas, the Indian Foreign Service looks extremely stretched, with just 600-plus serving elite officers. Expanding the service — using the existing generalist skills-based platform on which it is recruited and trained — would be a costly mistake. It would be far better to add the human resources, specifically needed in the ministry and in the missions overseas, through multiple entry options – lateral contracting, deputation from other services based on relevant skills and selective promotion from within.

Create a new position-based Apex Public Service Ecosystem

The origin of an exclusive service for external affairs, as opposed to a combined one for political and external matters lies, in the Government of India Act 1935. The idea at that time was racist. A separate “political” wing to deal with Asiatic powers — namely the Indian princes (there was already a separate home department for police and security matters) and a “foreign” wing to deal with the European powers.

Is it time now to end this farcical divide. “India unlimited” should have a seamless, internationally competitive and standards compliant architecture. inside, out. An integrated, elite Apex Public Service ecosystem for the Government of India, consisting of no more than 3,000 officers, could be a targeted support mechanism. Selected by the UPSC on merit, at mid-career, with a minimum experience of 10 years, it would provide the specific position-based skills and expertise, required for formulating policy and representing India at technical negotiating fora in trade and intellectual property; fiscal management, including tax; economic development and technology; social protection; human development and human rights.

ambassador

A foreign secretary has boldly and transparently opted to step directly into an executive role in an Indian corporate entity. Over the last decade retired IFS officers have taken to self-acquiring a life long title, copying the US practice, of “Ambassador” – a reminder perhaps of their once hallowed status as a flag officer oversees. Now, many more may cross the divide between them and the “boxwallahs”. But till it becomes common to see retired IFS folk jostling amongst the corporate crowd, it will be odd to see an “Ambassador” parked at Bombay House, the Mumbai headquarters of the global Tata empire, rather than at Birla Building in Kolkata, which is the original owner of the brand.

Adapted from the authors opinion piece in The Asian Age, April 28, 2018 http://www.asianage.com/opinion/columnists/280418/govt-india-inc-time-to-diffuse-the-red-lines.html

What the cash crunch foretells

Parliament's winter session

Conspiracy theorists are hard at work to identify the drivers behind the ongoing cash crunch, that has left the automated teller machines (ATMs) in cities and towns across large parts of the country dry. There is much finger pointing between the Reserve Bank of India and the commercial banks, both private and public sector, each accusing the other of being responsible for inefficient operations. It is unusual to see this level of discord, bordering on acrimony, between a regulator and the regulated entities.

Commercial banks bear the brunt of fuzzy policy objectives

The banks allege that the supply of high-value notes has dried up. The Bank Employees Union alleges that a shortage of imported printing ink at the currency press in Nashik could be one reason. Alternatively, this could be a covert attempt by the government to correct a problem dating back to the November 2016 demonetisation — the incomprehensible introduction of a Rs 2,000 note to replace the Rs 1,000 note as a measure to reduce black money. Phasing out the offensive new high-denomination note and stepping up the printing of new Rs 500 and Rs 200 notes instead is a more obvious and welcome blow against black money. The Ministry of Finance says Rs 70,000 crores worth of such “Hi-Value” notes can be printed in just one month. The value of such notes in circulation on March 31, 2017 (the last public data available) was Rs 7.5 Lakh Crore or ten times the value of such notes printable in just one month. So why a shortge ?

RBI waffles with poor communication

The Reserve Bank, unconvincingly, denies that there is any cash crunch and alleges the inefficiency of banks in properly allocating the available cash. Could this be a surgical strike by the banks and ATM service providers who have got unsettled by the criminal investigations into fraud or are upset with the March 2018 decision of the RBI to end the incentives for installing cash recyclers and ATMs for low-value notes? Was it their intention to embarrass the government by engineering a cash crunch to coincide with Prime Minister Narendra Modi’s visits to Sweden and the UK for the Commonwealth Summit? Possible, but far-fetched.

Cash remains king

cash is king

The most plausible reason is that the economy is reverting to its pre-demonetisation levels of cash held by the public of around 12 percent of GDP versus the hugely constrained post-demonetisation level of 9 percent of GDP in end of March 2017. Expectations were exaggerated on two counts. First, that the black economy would permanently be reduced. Second that digital and banked transactions could become uepreferred options. The second has indeed proved true. The use of cash by those who declare their incomes to tax, or even those below the tax levels, has reduced significantly.

But the big stick and carrots embedded in the Goods and Services Tax to incentivise the switch to banked transactions are not widely experienced yet. Systems and reporting compliance are clunky and curiously disadvantage the small, honest entrepreneur. Other small businesses may be unviable with a tax load.

RBI – bitten by the bug to ration currency, & create the “statistical” basis for “digital victory” 

Anecdotal evidence of how cash transactions are done show that post demonetisation, Rs 2000 has replaced the earlier Rs 1000 note as the preferred stock of currency held by high value entities and individuals. Unfortunately, RBI has squeezed the printing of this note. Prior to demonetisation, for every Rs 1000 note available, there were three Rs 500 and three Rs 100 notes. Post demonetisation, for every Rs 2000 note available, there are eight Rs 100 notes but just two Rs 500 notes available. RBI has curiously enlarged the relative supply of the highest value note (which is used mostly for individual stock of currency)  at the expense of having more transaction related currency in Rs 500 notes- possibly hoping that transactions would move to digital rather than remain in cash post demonetisation.

More importantly, not only has the overall quantum of currency, relative to GDP decreased, but even the share of Rs 500 and Rs 2000 notes, by value, in the total stock of currency has decreased, from 86 percent pre-domentisation to 73 percent in end March 2017 – possibly in expectation of individuals banking surplus stocks of money.

The ground reality is that the cash-based supply chain of goods and services is a subset of the demand for cash contributions, related to electoral politics. Highly contested elections are scheduled for mid-May in Karnataka and later this year in several other states. Cash resources will be needed to buy SUVs, print advertisements and motivate the lethargic population to vote.

Election Commission hesitates to adopt T.N. Seshan’s (ex-Chief Election Commissioner 1990-1996) muscular credo on mandate

ECI

Oddly, there is not a peep out of the Election Commission of India (ECI), which is charged with the responsibility of ensuring that election spending remains within the implausibly tight limit of Rs 20 to Rs 28 lakhs per candidate for Assembly elections. The EC has adopted an “end of the pipe” strategy. The intention is to catch the crooks once they show their hands via excess expenditure. A more proactive EC could have recognised the red flags of unusually high cash withdrawals unearthed by the media. It could have directed the Karnataka government to report on the ensuing potential for subversion of the code of conduct and the measures being taken to heighten border vigilance, to clamp down on cross-border transfers of cash. One can imagine former chief election commissioner T.N. Seshan diving through this open door for enhancing the regulatory ambit of the ECI. But today’s election commissioners appear to be content, at least overtly, with a narrower definition of their mandate, strictly as per the law.

RBI – a regulator at odds with its “caged parrot” status 

To speak the truth, the glory days of Indian regulatory institutions are over. Even the RBI, the first to be legislated into existence in 1934, is going through strained times. Demonetisation had spread the apprehension that the RBI was led by the nose from North Block in New Delhi. The extent of wilful defaults in the bad loans of public sector banks, often the consequence of ever-greening of impaired assets and plain fraud, also points a finger at the RBI for exercising inadequate oversight.

RBI governor Urjit Patel had appealed to the government through a public address on March 16 to bring public sector banks into a uniform regulatory arrangement as applicable to private banks. Domestic and international professionals support the broad thrust of a uniform regulatory arrangement for all banks. But the subsequent expose of the yawning deviations in ICICI Bank and Axis Bank from gold-standard board governance have cut the ground from under the governor’s feet.

Public credibility of commercial banks at its nadir

Mutual funds are upbeat about the prospects for equity investment in private banks. But the average person is inclined to quietly diversify away from private banks to the safe haven of public sector banks. Private insurance and healthcare are similarly perceived as being exploitative of the average consumer. It does not help that the Financial Resolution and Deposit Insurance Bill 2017 was worded so ambivalently that it fanned a deep seeded fear of savings deposits being sequestered as equity for resolving bankruptcy. Finance minister Arun Jaitley has been at pains to assure people that deposits up to Rs 1 lakh per account will remain guaranteed. But ministerial assurances provide very little comfort when elections are around the corner.

A common thread across this turbulence is uneven support from the government for beleaguered institutions and the absence of informed participation, quite unlike in the GST Council. RBI governor Patel bravely sat out the storm around the hasty implementation of the questionable policy option of demonetisation. But the Pandora’s box of crony capitalism has taken its toll. These are challenging times. Deeper bench strength, within the government, of trusted fiscal and financial expertise would help.

Adapted from the authors opinion piece in The Asian Age, April 21, 2018 http://www.asianage.com/opinion/columnists/210418/what-the-cash-crunch-foretells.html

Post-budget stocks – Storm-in-a teacup

bear

Those who live by the stock market must pay for their indiscretions. The stock market slid by 2.7 percent on February 2, 2018 – the day after Budget Day; by an additional 0.88 per cent on Monday, February 5, followed up by a further slide of 1.6% on February 6. in tandem with the global sell-off sparked by crashing US markets.

Its the Bond Market stupid?

Lazy analysis would pin the roil, in India, at the usual open-economy problem of capital flight to safety from small markets making them catch cold when the US sneezes. But a closer look tells a more granular story. Of course hot money will move about in search of higher risk adjusted return. So if the fed fund rate rises in the US to a 3% real return some foreign portfolio investors will move out. But consider that on a 6.5% growth and 4% inflation, the Indian stock market grew at 28% over the last year. There is plenty of room for the let the hot air out and still end up reaping a 8% real return in US$.

Media hysteria around the stock roil is over the top, as usual. Consider, if the stock market slid by 5.3% over three trading days post budget since Feb 2, the value which was lost was value added on since as recent as January 5, 2018 when the SENSEX was at 34154. On Feb 7 the stock market is roughly at the same level. India is high growth story with working markets. There are not many such markets available in the world where 8% returns in US$ are reasonable expectations.

Retail investors will rue their panicked selling

To be sure, panicked retail investors, who have sold their shares are the losers and heavy weight “bears” who drive markets by selling today and buying forward in the hope of buying back the same shares at a lower price, have gained. Note that even their capital gains till March 31, 2018 is free of long term capital gains tax. So bears have scored a double victory – taxless capital gains and re-purchase at a lower price. Brokers are also smiling because they make money of both sales and buys.

For small investors, the lesson is that despite the hype, what happens in the US stock market must not dictate their actions in India. Our markets rise and fall due to a variety of reasons- not just what is happening in the US. There is enough financial fire-power with domestic institutional investors to substitute, a temporary flight of foreign hot money to the US.

Domestic drivers of stock markets 

Stepping back here is an alternative story of why Indian stocks fell post budget.

Will inflation rear its ugly head again?

inflation 2

First, inflation fears arising out of the Budget proposals. The fiscal deficit this year has overshot to 3.50 per cent of the GDP, with no respite likely even next year. Mix this with the possibility of oil prices increasing further and the picture turns toxic.

Oil prices (Brent) started increasing from US$ 46 a barrel in end July 2017. They reached US $60, three months later, in end-October 2017. The high of US $70 came in mid-January 2018 with a subsequent cooling off to US $68 per barrel this week.

Consumer price inflation in India, was at 4.5% in 2016-17. Thereafter, it declined through the first half of 2017-18 but increased to 4.9 per cent in November 2017. But food prices tapered off, so 2017-18 is likely to end, with a similar inflation level as 2016-17.

Note that crude oil price increase during the second half of 2017-18, of around 50 per cent, has not directly fed into Indian inflation because government passes only a marginal proportion of crude price changes to final consumers.
2017-18 was a perfect storm. Growth reduced by at least 1 per cent due to the shocks of demonetization and introduction of the GST. These negatives have abated. Direct tax collection this year is 2.5 per cent higher than budgeted. Next year they are budgeted at 14.4 per cent higher than receipts this year. Receipts from GST next year are budgeted at 54 per cent higher than this year. These positives illustrate that broad fiscal stability around 3.5 per cent of GDP is possible, even if crude oil continues to trade at $70 in 2018-19.

Fiscal policy in 2017-18 has prioritized putting income in the hands of consumers – government pay and pension hikes; pro-poor income support (MGNREGA) and farmer income support at the expense of publicly financed investment in infrastructure. More income with consumers creates aggregate demand for better utilization of the surplus manufacturing capacity. Reviving exports – driven by an uptick in world trade – will also absorb some surplus capacity and create value. Inflation fears are consequently overblown.

Global ques only deepen domestic bearish trends.  

Second, the big bear of multiple increases in the US Fed funds rate, to cool an over-heating domestic US economy, has been looming over developing markets. Last week Bond prices fell, pushing up yields in US and Europe, in anticipation of increases in the fed rate. However, yesterday, bond yields pulled back up.  The signals are unclear. More likely it is domestic drivers which are punishing markets.

India has uncovered financial fire power post the crack down on cash and carry

Third, we have a large community of around 40 million domestic investors in our stock markets. Around Rs 1 trillion flooded stock markets, post demonetization, as the earlier mouth-watering returns in realty and cash and carry trade dried up in January 2017. Savvy intermediation by mutual funds and portfolio management companies facilitated the switch into financial assets by investors.

Churning your portfolio helps your broker more than you

But most investors buy and sell based on trust, led by their share brokers. These market participants are likely to have advised investors to sell and book their capital gains in anticipation of the long-term capital gains tax (10 per cent of capital increase) being imposed on all equity sell trades from April 1, 2018.

This advice is flawed since it ignores provisions, sensibly introduced by the Budget, of “grandfathering” capital gains till February 1, 2018. It makes little sense to sell in a turbulent market, unless you desperately need the money. But who can shake an investor’s faith in their trusted share broker -who incidentally, earns a fee on both the sale and the re-investment in – what else but shares!

Government needs to steer the ship of state steadily- no surprises please

The recent experience with demonetization has not helped. Uncertainty in financial arrangements is crippling and its trauma lingers. Under such circumstances, rumors acquire an undeserved potency, over reason.

Fall out of imposition of dividend distribution tax in FY 2018-19

Fourth, treasury management requirement of mutual funds, particularly for their “dividend based” schemes, could also have prompted a sell off. The budget has proposed a 10% dividend distribution tax on equity mutual fund schemes, to level the tax imposition on capital gains (the basis for investor earnings in growth-oriented schemes) and dividend distribution (the basis for investor income in dividend-oriented schemes). Mutual funds will try and distribute the maximum dividends to their investors, in this fiscal itself, to save them the tax imposition next fiscal. This requires mutual fund to sell equity holdings to generate the cash required.

At the risk of gross simplification, 60 per cent of the sell-off, of around 3.5% of market capitalization till close of February 5, 2018 was due to investor uncertainty about future taxation and the treasury needs of mutual funds. Inflation fears possibly drove 25 per cent of the sell off, whilst global cues were responsible for the residual 15 per cent. The good news is that this sell off is temporary. Stock markets are now back to, where they were just a month ago on January 5, 2017. A mere storm in a tea cup, created by investor exuberance in anticipation of a “please all” budget.

Buying into India’s growth story will recover the tax you pay though growth

lioness

So, hang onto your shares and count your blessings over time. If you hold an equity portfolio of Rs 20 lakhs, an 8 per cent dividend payout of Rs 160,000 will attract a tax of just Rs 16,000 – easily absorbed by postponing purchase of a microwave oven. In the case of additional capital gains, over and above the higher of the purchase price or the market price of the share on February 1, 2018 –-assuming a gain of 15 per cent or Rs 300,000, is just Rs 30,000. Making do with the existing car tyres would do the trick. Anyway, eating out and taking the metro or a taxi are rational and possibly pleasurable substitutes.

Adapted from the authors opinion piece in Indian Express on February 6, 2019 http://indianexpress.com/article/opinion/post-budget-uncertainty-global-cues-drives-market-selloff-5053028/

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