Up Ahead: Baby Steps Reforms

As the days go by it is becoming clear to me that though there will be a reforms burst after the Presidential elections. At the same time, one can't expect radical reforms. Diesel price hikes will correct some of the madness going on due to months of inaction. In the insurance and mutual funds industry, there might be some moves to get the distributors interested. I am not sure whether that will be enough. One can practically rule out any kind of fiscal stimulus since government doesn't have anything in its bag and is lagging way behind in revenues.Some forward movement in single brand retail, pensions and GST, even a firm date of GST implementation next year will help matters. There are two areas where the government will be keeping its fingers crossed  and both deal with inflation. It will hope that the monsoon isn't too bad. It never is perfect and whenever it is too good our country can't handle it with floods and waterlogging give everyone a hard time. Incidentally, what a sad situation it is for an aspiring economic superpower to be dependent on monsoon? That's basically depending on good luck, by the way! If the government can get the bureaucracy to act on the files instead of sitting on them, it will also constitute reforms in my eyes! The other aspect of inflation that the government will be banking on is the base effect of the indices. This will give people an illusion that things are getting better. Of course, the larger question is, are they? For an answer just try buying vegetables and groceries. The high and still rising prices will make you laugh in exasperation. Did anybody say live entertainment?  

Why Manmohan Will be More Effective than Pranab Mukherji

I am putting up a post here after some days. Much of the reason has been the lack of anything new or significantly different happening that would make me react. However, anybody who has been following my posts would realise how accurate my reading was about a reforms burst after the presidential elections. Manomhan Singh, the country's PM and the new Finance Minister is preparing for the burst. From what I have come to know and realise, there would be a burst of moves at the end of July. Expect this to continue up to November. Diesel price hike and pensions bill apart from Good and Services Tax (GST) clearly seem to be on the agenda. However, what I find interesting are the reports coming in the media that the PM was getting held back by the FM, Pranab Mukherjee in his reform push. Well, there is some truth in it I suppose. You can out it down to their different DNA. The PM is essentially an economist while the former FM is a politician despite his training of an economist. During his 1991-95 stint as FM, Manmonhan Singh's job was constantly eyed by Pranab Mukherjee. Nobody may now talk about it now but I have seen the fate of some people I know (economists) close to Pranab Mukherjee who were banking on him to get the chair. But that didn't happen despite the Harshad Mehta scam in 1992 when by the year-end Manmohan Singh showed his readiness to resign. Prananb had to be content with a portfolio like Commerce. Also, during that period Pranab's rehabilitation in Congress after his brief exile wasn't complete. I think it was only after he did quite a few dirty but effective jobs in leadership and other purges that he won the confidence of the top prty leadership. In UPA-II, he had argued internally that he was getting old and couldn't travel around, something needed in external affairs, his former portfolio. Once finance portfolio was given, it allowed him to chair the huge number of GoMs though one has to salute his ability to work hard. Will his exit make a difference? I suspect yes. Cocktail of politics and economics is always needed and that is where Mukherjee's brand of management worked as it didn't let anything go out of hand. But right now is the time for hard choices and decisive actions. It needs an economist and a reformer which Manmohan Singh is. Of course, one can always argue that Manmohan Singh always reforms under duress and with the back on the wall be it 1991 or now. But then, it can never be too late, can it?       

Life After RBI's "No Rate Cut"

So RBI didn't cut rates yesterday and people all around were disappointed. It is not just people related to stockmarkets or corporates but even people like existing and new home loan and car loan borrowers. I don't blame people for expecting a rate cut very badly. When you are part of an economy that has been growing so fast, it is natural for people to extrapolate where they can reach if they continue to grow at the same rate. And then not to be able to do so can be a difficult reality to accept. My guess is that RBI in its Hyderabad brainstorming where they made plans on how to tackle an European contagion after a possible disorderly exit of Greece, had planned for many scenarios. By yesterday morning it was too clear from Greek election results that there was going to be no disorderly exit of Greece from the Euro which had for the time being, spared the world some serious pain.

RBI doesn't really have too much of headroom. For all its tinkering of rates, it has not been able to do too much on its number one objective: inflation control. And how can it be effective? Monetary policy has to work in tandem with fiscal policy and normal policy implementation. I was interacting with a very senior and now retired FinMin official yesterday after a radio show that I moderated. He told me what we all know. The bureaucrats have stopped taking decisions and not acting on files. As I see it, RBI is saving its limited blessings for any nasty surprises that may spring from Europe in the future. Although the Greek mess, after the election doesn't look as menacing as some people have thought, it is the larger economies of Spain and Italy whose lack of access to capital markets in the future is what may create more headaches for all across the globe. In this backdrop, can people expect anything positive in the days to come? Well, I will just point to my last post. I continue to believe that there will be a renewed reforms burst during August-November 2012 just after the Presidential elections. Of course, Pranab Mukherji needs to win that election. I suspect that there will be some serious progress made in Direct Taxes Code and Goods and Services Tax areas along with pensions reform. These are areas where the major opposition party, the BJP, has chaired Parliamentary Committees and made recommendations in favour of reform. Their party persons seem to be quietly resurrecting DTC and GST.  We can even have progress on  FDI in aviation. If the government can get an FDI hike in insurance to 49 per cent, it will be a bonus. Thanks to a higher base effect inflation figures may not look that disturbing.. Is this what I want to see happen or is this more likely to happen in my view? I think I will emphasise on the latter.

Reforms Burst during August-November 2012?

Let me begin by saying how proud I feel on hearing that the government has contingency plans in case of more global madness if Greece exits the EU. Wow! Something is working in the government at last! But such plans can at best contain damage from the contagion that will follow and can not insulate India. It is not the Greek exit that will matter so much but the sentiment of panic that will spread across the globe that will be the greatest threat to all countries. Stockmarkets, banks, every economic activity that is bound to be affected. Lenders will have even lesser confidence in weaker European economies like Spain, Portugal and Italy and their access to capital markets will effectively get denied thanks to risk premiums demanded, something that is already happening with Spain.

Back at home, the Congress party has asked the Government  to pull up its socks. Somebody needs to tell these wise people that in the last six months no effort has worked. Haven't they heard of Newton's first law of motion which talks of bodies being in permanent state of inertia or motion unless acted upon? Once you go into a slumber it is difficult to get out, especially when your allies and the opposition want to ensure that you end up doing nothing. So does this mean that this will continue for the next two years till fresh elections happen? I am talking aboit a lack of reforms that is impacting the economy big time. Let me say what I think might happen till 2012-end from now on.

Once the  Presidential elections get over in July, you can expect a short reforms burst during August- December 2012. Government wants to do it badly. In December, many states go to the poll. This probably the last time the UPA II will be able to reform anything. What could happen during this period? Well, with the support of Samajwadi Party, government is likely to raise diesel prices somewhat. This will not be too difficult. Any hike will help. The government can raise Rs 4 and then roll it back to Rs 2 under pressure from official and unofficial allies. We now have a rich history of rollback starting from the time of Yashwant Sinha,  finance minister during the NDA regime. Second is likely to be the Pension Bill as it can bring in large amount of long-term foreign money. BJP supports the legislation and the Parliamentary Standing Committee had its own Yashwant Sinha chairing it. With some more tinkering TMC might be pacified. A 26 per cent foreign stake is not a bad start. It will bring some more dollars. Then, FDI in civil aviation could open up. the whole sector badly needs it. What else? Well, my hunch takes me only this far and then we shouldn't be too greedy, should we? From 2013 onwards, you can expect little on the reform front with all focus on being re-elected. I don't expect any of the principal political parties to be come out entirely happy with the year-end elections. Then, that's a topic for another day.

P.S By the way, Nouriel Roubini, "Dr Doom" does have many nice things to predict in 2013. A google search will help in reaching videos and articles. http://www.roubini.com/analysis/174887.php. All the stuff got uploaded yesterday

India is Not Alone: Global Slowdown Woes

Back in Delhi after an outstation trip, I must say the first two days of the week brought little surprise or cheer to me in terms of developments in the economy or the markets. Of course, it is easier on everybody’s nerves not to see the rupee fall the way it did last week. While driving back from work yesterday, I heard something interesting on a radio show reviewing the stockmarkets for the day. It said that the rating agency Moody’s doesn’t see its India rating change due to the fall in rupee (this is an old news though). The reason:  Since India’s political leadershop doesn’t look well-placed to bring about the much-needed adjustments in the fiscal space it thinks that the rupee’s correction accurately reflects the country’s realities. Coincidentally, this is a line I and my co-authors took last week when we wrote the latest cover story of Outlook Money magazine (www.outlookmoney.com). The issue hits the stand today. Hopefully, our readers will like the cover story and will find it useful.  The other disconcerting news coming in is the slowdown in China. Over the weekend, I read an interesting New York Times article on the slowdown there. The link is given here. http://www.nytimes.com/2012/05/25/business/global/chinas-once-hot-economy-is-turning-cold.html?pagewanted=all. Then, there is a video link from the Financial Times http://video.ft.com/v/1660792089001/China-faces-difficult-choices. The China real estate and construction scene always looked dicey to me. But now things should be worrying. The other interesting update I have managed to get is about the Brazilian economy. Apparently, in that country as well the authorities have tried to cool things down and they are now looking at a growth rate of about 4 per cent. Like India, it needs further reforms. A recent Economist articles argues on the same line. Here is a Wall Street Journal article link on demand for Brazilian debt http://online.wsj.com/article/SB10001424052702303395604577434412657454798.html?mod=rss_markets_main. Before I sign off, I need to say I thoroughly enjoyed reading the recent Economist survey on retail banking http://www.economist.com/node/21554742.

Reality Check at Smartphone Outlets

The mobile phone market is undergoing transformation with the rapid proliferation of smartphones. Not surprisingly, Samsung which has come up with the most number of new offerings seems to have toppled Nokia from the top spot where it had found itself perched for long. The smartphone wave was not unexpected since with the spread of 3G services this had to happen. For a person looking for a new mobile handset after almost four-and-a-half years, I found my market research process has been educative and fascinating. The Nokia shops in Gurgaon, the Delhi suburb, where I stay have been far less crowded than what was the case when I bought my last handset. The gap in their product portfolio seems to be telling from this simple indicator. People don't seem to swarming single company stores too. The shopkeepers scoring well seem to be those who are selling handsets from different companies. In some of the shops I have visited in the last 45 days or so, there is no place to stand at any time of the day. You will find yourself elbowed around. Then, there is the fascinating world of mobile accessories. There is simply no end to what you can do with your mobile phone. Of course, while I might not use most of them but this gives customers like me a feeling of empowerment. That's not to forget that making a choice has become more difficult. I have seen that for myself with the amount of time it has taken me to get a fix on what I want and what I can afford. But a more important thing is that I realised that with this kind of proliferation of mobile phones and their accessories, there is little doubt that our future is, well, mobile. For a finance person, there can be little doubt that the next frontier is mobile money--financial transactions and financial information dissemination on the mobile. While some might kind argue that it is already happening. But I suspect  we have seen nothing yet. After mobile shops never used to sport the look they do today. Smartphones are really promising an exciting new and smart future for us.

A Problem Called Europe

Uncertainty over events in Europe and its impact on the European crisis continues to take a toll across the globe. In India, its impact on stockmarkets this week is clearly visible where despite the Finance Minister's clarification on GAAR (which to some is "half-hearted", if not half-baked") there have been downward moves in the market and less-than-required-enthusiasm. To me, the "euromess" if I am allowed to coin this has two important messages. First, to enjoy economic benefits of a economic union you need to have monetary and fiscal policies both under single control. Minus the fiscal levers and fiscal discipline, it is not very difficult to get into the kind of mess Europe has got into. For instance, tt is now common knowledge that all the members of EU have flouted their fiscal deficit many times during the period the Union has been around. Included in the list is Germany which at times pontificates to other nations. If you take a step back and take a hard look, you will see similarities between and Europe and India as well. While India's monetary authority has been taking action in the recent past in India we don't find matching contribution by the government on the fiscal front.

The second lesson from Europe is the more worrying one. Recent elections have thrown out governments that have been following policies of economic austerity. While there are eminent economists such as Paul Krugman who feel that these policies should have not been initiated in the first place since what was required was more good old Keynesian government spending to create jobs and not worry about deficits and inflation as some governments have, the message from the electorate is that if a government's policy doesn't work for people, it will be thrown out. But can people throw out a system be thrown out if it doesn't work? History is replete with examples be it Germany in early 1930's or many others when demagogues seized power after thwarting democracy, free speech and free markets, encashing on people's desperation. In Spain, it seems about 50 per cent of the youth are unemployed. Anybody in the know of the economic situation can tell that the current euromess and global financial crisis will not go away in a hurry. Thus, while it will be easy for political parties and politicians to seize power encashing on popular disenchantment, it will not be easy to deliver the moon they promise as there are no easy ways out of the mess. The danger lies in people getting disillusioned with existing systems altogether and we will have a global cesspool. If one reads accounts of Greeks reeling under the impact of austerity measures one would start realising the meaning of "lost generation". While in US the situation is better thanks to a lower unemployment rate, but profound changes are already happening to people and their lives. Popular media is documenting how people even in their 70's are continuing to work sometimes at half the pay, because they can't afford to lead the retired life. The other scary lesson from anti-austerity movements is that once people get used to certain things they will not be able to live without them. It will be difficult for politicians to convince people on matters of economics. For instance, how will you convince people in India to pay user charges for electricity, cooking gas and diesel? Who can? Try telling this to our legislators who dole out one freebie after the other to the public as if there is no tomorrow.          

New Pension System (NPS): What Lies Ahead

It is now three years since the New Pension System (NPS) was made available for the general public (May 2009). For government employees who started working after January 1, 2004, their mandatory pension contributions are being managed by default by this system. However, managing government's pension liabilities was just one of the objectives of setting up NPS.Sure, thanks to the previous defined benefit system where a retired person gets pensions based on a pre-determined formula, the pension liabilities of central and state governments were spinning out of control. NPS, which is based on defined contributions where the pensions you get depends on the final outcome of the investment performance of pension fund managers and your choice of investment options, would have helped stem the rot quite a bit. Things are quite precarious when it comes to pension liabilities in case of some states. But the biggest reason for having NPS was to cover 89 per cent or so of the workforce not covered by any form of pensions. There the progress has been dismal. I wonder  if NPS has even crossed 10,000 subscribers from the general public. Why? The pensions regulator PFRDA thinks that incentives to distributors holds the key. For NPS, the absence of distributor incentives and a very small fund management charge by fund managers makes major stakeholders far less excited about it. No wonder, there is very little awareness about the scheme in the first place. Only recently there have been some TV ads. All this is a pity for NPS is a great product, something acknowledged by all experts. It provides great options. It is portable i.e. you can move from one job to other or cities and you won't have to open another account. Besides it doesn't allow easy withdrawals, a bane of all Indian pension schemes. But I don't think the two problems I just mentioned are the only ones bothering NPS and Indian pensions reforms in general. The key to giving fillip to pension reforms and NPS is to get the PFRDA Bill passed something that is being opposed by UPA allies like TMC and former allies, the Left. Like all sectors, you need a regulator or an umpire to get the development and regulations rules in place. People will only start taking things seriously then. PFRDA then can also make efforts to make NPS better known. The PFRDA Bill  passage through the Parliament seems postponed yet again. In the next 12-13 years, India will possibly add about 100 million people in the ranks of the retired. That's the population of many European countries put together. Don't tell me that it isn't important enough to be attended to.      

FD and Loan Rates: The Road Ahead

Back in Mumbai after a fortnight, I am finding the combo of heat and traffic jams a little difficult to handle. A short meeting with the top executive of a large PSU Bank yesterday was illuminating. It seems that there is no visible impact of the RBI's recent rate cut though it is a bit too early. Neither are any trends visible as far loan offtake is concerned. Last year, there was clear decelaration as far as home, car and other retail loans were concerned. The top banker expects this year to be no different. Possibilities of any further rate cut look remote with so many factors being in the play. For instance, international commodity prices. And yes, thanks to the interest rate differential between savings accounts and FDs, there was a large scale migration from savings account to FDs. You know what that means for banking stocks, To me, in the days to come, one can expect the situation to remain more or less at the level existing last year and not anything dramatically different.   

Eagerly Waiting to Read Robert Shiller's "Finance and the Good Society"

"Finance and the Good Society" authored by eminent finance academic Robert J.Shiller is out in the US. I am really eager to read this book and hope to grab a copy soon. As most of us know, Shiller is no ordinary finance don though he has been associated with the prestigious Yale University for long. He has been one of the most influential thinkers in the area of finance and perhaps one of the few who foresaw the housing bubble in the US that led to the current global crisis. Of course, his book "Irrational Exuberance" was seriously influential. It is difficult to comment on a new book without reading it. But I am reproducing two links one of which is an interview that I enjoyed reading and another is an excellent review. Clearly, in the new book Shiller is trying to laydown a guidemap and an agenda for the future and trying to reconcile some of the contradictions in capitalism that seem to have surfaced in the recent past. In many ways, we probably have another book like Raghuram Rajan's fabulous 2010 "Fault Lines" that has wonderfully helped us understand the real issues that led to the global crisis and what needs to be done ahead. Incidentally, Rajan was another one of the very few who saw the global crisis coming. Shiller  has surprised many in his new book with his stance on some popular issues such as high pay of finance executives that seem to have been caught the imagination of media and public in the US. I am not surprised though. In 2010, I had the privilege of interviewing  him (http://119.82.71.56/article.aspx?266301). Those 45 minutes must surely have been one of the best in my two decade journalistic career. During the interview the wonderfully mild-mannered scholar debunked one myth after the other (including the myth of India getting to have the so-called "demographic dividend"--he told me it was China which was getting it as it had people in the productive age group of around 35 years getting into the workforce whereas India had the demographic bulge around age 25). When I invited him to visit India, he told me how he had just attended a wedding of close family member who got married to an Indian girl. I am not sure whether I will ever get to meet Shiller but hopefully I will get to read his book soon. In the meanwhile, links like the one below will help.       

http://money.cnn.com/2012/04/10/pf/investing-Shiller.moneymag/index.htm

http://chronicle.com/article/Robert-Shillers-Mission-to/131456/

A Peep Into the Future Through My Weekly Home-Buys Basket

Is it reading too much in small things and being an alarmist or is it an indicator of things to come? Like every weekend, I went buying vegetables and groceries earlier in the day today. I didn't return home too thrilled at how light my wallet had become. Vegetable prices and food inflation in general are up once again and big time. We got the government's higher inflation figures late last week. But I didn't realise just how bad things had become. Vegetable prices have practically doubled in Delhi and the National Capital Region ijn the past one month. Worse, the quality of supply is dreadful. Things are probably as bad as middle of last year. While oine can blame local and seasonal factors for rise in vegetable prices which may not be the case here but what about groceries? Their prices, especially branded ones, are also shooting up. For example,. the branded rice bag that my family uses is now costing 10 per cent more since the last time I bought it 45 days back. There seems to be price increases on this front too every 45-60 days. Smart FMCG companies are reducing amount and weights in their packs quietly. And when the Prime Minister tells you that the government needs to raise fuel prices, you can be quite sure that this madness will continue for long. The effect of the Budget 2012's increase in service tax and excise will not have percolated to the system still. It might take a month or 45 more days. So, where does this leave the country's and individuals' finances? I, for one, feel that chances of any further cut in interest rates during 2012 is diminishing by the day. We can expect the economic sentiments to continue to weaken with impact being felt both on the rupee, making imports costlier. Like last year, in high inflation times, people will continue to take refuge of  gold and real estate so that they can preserve the value of invested rupees. Of course, people will end up saving less thanks to high inflation and moderate or no pay hikes. What about stock markets? I suspect that we will need to look for goodies like more currency pumping by central banks abroad. Well, I guess its time to change the topic. "Avengers"  anyone? 

Uncomfortable Truth?

Another day and yet another faux pas. The government seems to be having little trouble saying things and backtracking later. The latest in the series is the government's economic Advisor Dr Kaushik Basu saying that one can expect Big Bang Reforms only after elections in 2014 as the new government will have the requisite majority in the Parliament. Though embarassing, Basu was speaking the truth. But honesty and politics perhaps don't go hand in hand, do they? Once the principal opposition party BJP latched on to the statement, the government said that the economic advisor was "misquoted". How's that for an original excuse? If you take  a close look at some of the economic reform legislation pending, be it Direct Taxes Code or the Goods and Services Tax (GST) or the pensions or insurance bills, one will realise why Basu was speaking the truth. They don't seem anywhere near the horizon when it comes to being passed by the Parliament.  We will be lucky if we see DTC and GST through by 2014. Moreover, the present government isn't getting the support it needs from its allies to pass these legislations. So, why the denial? Will it help delude people? You bet it won't.

Rogoff's Bleak Forecast for the Euro

We have all seen recently what the current Eurozone mess can do to our stockmarkets and to our economy. Therefore, it is in India's interest that Eurozone mess never gets out of control, especially this year when the government's finances are already stretched and it doesn't have the wherewithal for a bailout. Then there is the worrisome current account deficit problem arising from the weakened growth of exports thanks to less-than-satisfactory growth of the global economy and rise in the value of our imports, many of which, we can't do without, chiefly crude oil and edibile oils. To top it RBI has the problem of keeping inflation under check which is still at a fairly high level. In this backdrop, it is further chastening to read eminent economist Kenneth Rogoff's recent article on the euro which has been reproduced in some places http://www.project-syndicate.org/commentary/a-centerless-euro-cannot-hold. Now Rogoff is no ordinary dude. He is famous for having studied recessions and downturns over centuries in his book with his ex-World Banker co-author Carmen Reinhart called  "This Time is Different: Eight Centuries of Financial Folly". He discusses arguments from the theories of two Nobel prize winners James Meade and Robert Mundell to paint a fairly grim future for the euro. Why is an article like this important? Because  you just have to peep into business papers and TV channels to see the plethora of so-called experts who are giving advice and predictions based on the assumption that things will get back to the same old ways of pre-2008. But will they? Has the global economy changed irreversibly by the global economic crisis? Food for thought.

High Cost of Drug Discovery and Stock Prices

With not too many really interesting things to write about, I thought I will just put up this post about an  interesting article that I read last week. The article appeared in Forbes http://www.forbes.com/sites/matthewherper/2012/02/10/the-truly-staggering-cost-of-inventing-new-drugs/ that talks about the actual cost developing a new drug. Like others, I also used to believe that the average costs of developing a new drug is around $4 billion but the author rightly argues that we need to divide the total R&D spend by the number of drugs approved. This means we take into account the failure of drugs to make it to the market. The results of the exercise for global pharma giants are dramatic. They are spending far more money than what is popularly believed. We all know the original drug discovery needs deep pockets but when you look at keep these figures you realise just how deep the pockets need to be. Now, what are the implications for Indian pharma firms? Clearly, it is a tall ask for Indian companies to make a transition to be part of original drug discovery club. No wonder not too many Indian firms are now talking about these ambitions unlike even what it was some years back. An important aspect here is that the stock market doesn't really reward drug discovery and will look at it as an expense unless you can quickly monetise it in the near future (that's 6-9 months for you). Of course, they can be part of certain segments of the drug discovery process like discovery of the molecule or trials. So, the next time a pharma company talks of drug discovery we know the context in which those statements can be evaluated.     

Markets' Weakness Ahead?

Talking about the future direction of stock markets is difficult yet tempting. At a radio show on Thursday, April 5 where I was invited as an expert, I was asked the same question by the host. It is quite clear that when markets open on Monday, April 9, 2012, a few things will be at play. The bad news from Europe will be working on investors' minds, especially foreign ones. Bar Germany, the news from Europe is  not great. It is quite clear that what the continent is going through is not "shallow recession" as some had suspected but something deeper. Spain's debt markets don't really believe that it's government can pull things off and maybe that's why the bond yields increased. It seems Portugal, one of the earliest, in the list of troubled European economies will need another cash transfusion later this year. Incidents like public suicides in Greece and Italy that happened last week will make things very difficult for lawmakers trying to take tough decisons. In short, no end of the Euro misery is in sight. Plus, Fed chairman Bernanke has ruled out another pumping of cash into the US economy that would have found its way into the global economy and thereby raised the prices of many assets be it stocks or commodities such as oil. My answer roughly moved around these two major factors. As I write this post, it seems that the latest US jobs data is not too flattering. This will add some more impact to the negative sentiment. It was suspected that US companies would be adjusting to the reality of tepid growth and not step up hiring. That seems to have come true. Add information of a slowdown in China and there is a lot of negatives at work. In India, the markets and the economy could have benefitted if something had been done to negate these effects by moving positively on some of the areas where supply constraints are making life hell. But the government doesn't seem to be getting any of its moves right be it ensuring coal supply to power plants to clarifying aspects of its recent tax avoidance proposals. Looks like any expectation from the government is too much. 

Why the Rupee Could Become Weaker and Impact on Everyone's Finances

Now that the third quarter current account deficit figures of 4.3 per cent of GDP is out a few things are clear to me. We will see a situation in the future where the gap between growth of imports and exports will continue to be yawning. You don't need to be an expert to know that the top items in our imports list are things that we can't do without. I am talking about petroleum and edible oils. With rising international oil prices being the single most important threat to the global economy, especially India, the import bill could go into orbit any moment whether it is tensions in areas such as Iran or another round of currency pumping by some central banks. In the past, the huge amount of cash pumped by central banks found its way to commodities such as crude oil, pushing up their prices. On the exports side, things don't look too great with global economy showing weakness. In the US, joblessness is on the decline but the rate of fall is not brisk enough. We know how things are in Europe and China is now talking about far lower rate of growth. The one thing that government could try and do was checking gold imports which it tried to do in the Budget. But then, jewellers had other ideas with their strike.
Given this situation, one can expect people to seek more dollars and than the rupee or the rupee's value to weaken. This in turn will only mean more inflationary pressures and more stubborn inflation. Less likely will be a cut in interest rates and greater impact on the bottomlines of companies impacting their stock prices. Of course, this will also impact the investments in equity mutual funds and growth funds of unit linked insurance plans (Ulips) this year. Clearly, it looks as if the new financial year of 2012-13 will be fairly challenging.

Financial Inclusion's Exclusive Problems

I started this blog late last year but hadn't been putting up posts regularly for long. I have savings accounts that I don't use regularly. Why I am saying all this? For some reason, when I heard that most of the new bank accounts opened in the countryside under government's financial inclusion efforts are showing no financial activity, I only got reminded about myself. But there is an important difference. I can do something about it while people in the countryside can't. You need to be getting payments that will move into the banks. That isn't happening. During my interactions various chief executives of banks in the last one year I have realised that they are waiting for government payments such as that of MNREGA and pensions to make this effort worth the bother.  That in turn depends on the implementation of the Unique Identification Number project or the Aadhar scheme. Once this unique number is given to a large number of Indians, payments will be made using this number as the reference. The FM mentioned that the scheme is ready for implementation in his Union Budget speech recently. I got my formalities for Aadhar months back but have little idea where and how the closure of the process will happen with a card or the number coming in. There is a lot riding on Aadhar be it rifle-shooting for subsidies to stop leakage or making the bank accounts in rural areas work. If successful it will become a role model for many countries. Till then, for banks, it will be more of following the diktats of RBI and the government.

Looking Beyond Fidelity AMC Sale

Late afternoon yesterday, I got to see wire reports about the sewing up of the sale of Fidelity's MF business in India. There have been plenty of media reports since the reports first broke in about the imminent sale.  The usual hyperbole was there in many cases. Some even went to the extent of saying that this development was a result of Sebi's numerous regulatory changes in the MF business  while some focussed on Fidelity's "high costs". To me some other aspects are noteworthy.

First, Fidelity is not exiting India as some think or at least from what I understand. In India, they have about 10,000 employees in various functions such as global research support. It is only exiting the MF business after revaluation of  its business. I expect most people in its Bangalore and Gurgaon offices to keep working. Second, unlike Indian businesses, large global corporations enter, exit and re-enter businesses in a particular country. We now have an example of at least one foreign player which has re-entered the MF space. So, how about things like costs and the so-called regulatory squeeze. To really appreciate the realities, one needs to step back a little from the picture to get a better view. The Indian asset management business or shall we say the MF business has never been able to get the scale it needs to reduce costs. Is it their fault? Perhaps partly. But regulations have been a constraint. For instance, if AMCs are allowed to manage assets of insurance companies instead of insurance companies having a separate set-up for them a lot of benefits of economies would have accrued.

Next, if pension reforms had taken off instead of it still being discussed in seminars, the critical mass of assets would have given MFs the benefits that could have trickled down to their costs. In this episode, let's try to understand one more thing. Outfits like Fidelity didn't really come to India to be in the MF business. Their eyes were on the the pensions business. Top AMCs across the world focus more on pensions because that is where you get the scale and the long-term money. You don't get people--both corporates and individuals--who are moving in and out endlessly giving the fund managers and AMCs nightmares managing the investments. One can argue that AMCs could open branches across India and reach out to the people. While this can be done imaginatively but the ground reality is that this expansion is often not justified as experience of top AMCs indicate that most of their businesses gets generated in large cities. So beyond a point you can't justify the expenses.

To be honest, I will miss Fidelity for three reasons. First, the way they went about their business with a long term view. It was refreshing to see their retail focus. The had more equity assets than debt ones with the latter typically coming to AMCs from corporates. Second, they didn't join the thugee party of launching one scheme after the other with little changes in them, a norm till recently to raise fresh money and keeping the distributors happy. Most importantly, some of their schemes were quality offerings.

It is clear from this latest episode, that under the present circusmtances that there are too many AMCs and schemes keeping things murky for the investors. A consolidation may not be such a bad thing for the investors as long as their interests are protected and for companies losing money. Now, have I just lost some friends in the industry by saying that?

Can Online Investing be the Key to Access For Small City Investors?

Despite all the advertisements for financial products that we get to see in large cities access to modern financial products is quite limited for a person staying in smaller towns or even villages. The largest players in insurance and mutual funds don't still have the kind of reach that will allow people to easily buy an investment product. Also, at a time when there has been a regulatory squeeze on costs be it insurance or mutual funds and the markets have been less-than-friendly leading to tepid growth and in many cases de-growth, one can't exactly expect financial service providers to go around opening branches and adding advisors and agents. Selling financial products through banks would have been a potent tool but then there are restrictions on the number of tie--ups in case of insurance. Also, with banks getting into such relationships just for fee income, the whole thing becomes purely transactional in nature. In a country where you have low financial awareness credible and quality fiancial advice needs to be bundled with the sales of the financial product. That really can't happen if a banker is just pushing financial products. Given this state of affairs, the glimmer of hope comes from the results of recent surveys that seem to be indicate that a lot of e-commerce transactions are happening in the smaller towns including a recent one from Boston Consulting Group (BCG). This should be great news for online broking firms that seem to be providing a whole range of services and products to people along with material on their sites that inform the readers about various products and services. Thisshould work for selling plain vanilla products such as term insurance plans, travel insurance plans and index mutual funds. How about more complicated investment products especially unit linked insurance plans (Ulip)?  I suspect that would need some form of one-to-one guidance though there are online versions of products like Ulips. The more complicated products need to be evaluated for their fit to individual situations. As Internet penetration increases in our country, we can also expect this medium to be a catalyst in enhancing access to financial products. That's a very desirable outcome in a country where reasonably high savngs that are not optimally deployed. 

Bye Bye Rate Cuts?

The government is going to raise petrol prices on April 1. We shouldn't be surprised. They always wanted to do this after they had presented Budget and the Parliament session was not in progress so that they don't have to face the heat there. I don't think even if Mamata Banerjee, CM of West Bengal and also the head of Trinamool Congress, a major contituent of the ruling alliance UPA, protests the government can't roll back since its finances aren't exactly on a roll. Actually, they are in a mess thanks to rising global oil prices. Oil price hikes cause inflation is something everyone knows. To that now add the increase in service tax and excise and you know that high inflation that was begining to get subdued is all set to make a comeback. Where does that leave RBI in terms of rate cuts? Between a rock and a hard place. If inflation rebounds or remains high, it can't cut rates despite the fact that growth is flagging. I also get a sense of a liquidity crunch all around from anecdotal evidence. It is becoming increasingly clear to me that a rate cut if any will be a small one, say 50 basis points, more towards the end of the year than now. That is not good news for home and car loan borrowers, besides corporates.

PPF Rate Hike and PPF's Future

There were many years in late 90's leading up to early noughties when the rate of interest for 15-year Public Provident Fund commonly available in post offices and some PSUbanks was stuck at 12 per cent and it looked as if nothing could make it budge. After a change in 2004, it hasn't really gone anywhere (the rate). That was till last year when the government announced that the rate will change every year and will be linked to government securities. The government has announced a higher rate for of 8.9 per cent (I need to double check this) for 2012-13. Ironically, this comes at a time when the rate for Employees' Provident Fund has been reduced to 8.25 per cent. While this had to happen for the latter given that EPF sees a tug-of-war among the three ministires that overseee it, the PPF development interests me. Why? If the direct tax reform blue print, the Direct Taxes Code comes into force, then PPF's attractiveness thanks to tax-free contribution, interest and maturity proceeds will see a change as maturity proceeds will become taxable. Link with market rates will make the rate realistic and not artificially high or low. This means that in the future it will be like a very low risk investment since it is backed by the government. If other lower risk options come up well such as FMPs and similar form of debt funds that pay more, are more tax efficient and can give Indians some idea of their eventual returns besides being accessible, people in the higher tax slabs may not try and hit the investment limit of Rs 1 lakh. Indians typically are risk-averse and will either let their money vegetate their or go for a fixed deposit. The development I mentioned will mean that Indians would actually moving towards having a debt investments' portfolio. That will be quite an evolution.

Teaser Loans' Day of Reckoning

It is a little more than three years that banks started coming up with step-up home loans or "teaser home loans" where you paid lower equated monthly instalments (EMIs) in the first 2-3 years--though progressively increasing--with the rates being re-set at the prevailing market rates after the period is over. Thanks to the attractive pricing, people made a beeline for this kind of home loan. Now that this period is getting over in early 2012, lenders and borrowers are waking up to what it would mean to pay at the market rates. For borrowers, there is a sharp spike in EMIs or tenures depending on what the age of the borrower is. If you are young, your loan tenure would be increased but if you are not lucky, get ready to pay higher EMIs, in some cases as much as 20 per cent more. That's a lot in these times of downturn. With existing market rates being lower than the rates for the teaser loan rates after resetting, it makes sense for people to migrate to another borrower, though the difference in rates is not huge and there would be costs of migration such as for processing. Not surprisingly, loan providers have started offering fresh rates to "teaser loan" customers. Right now, only two major providers I know of have done this. However, I do expect more to follow suit. This is clearly a great case study of unfathomable long-term consequences of "smart customer acquisition moves". But, to be fair, global financial turmoil of the past four years have played havoc with everyone's calculations.

Will the Government's Disinvestment Trick Work?

The government in its latest Union Budget had proposed that it will raise Rs 30,000 crore in the next financial year through disinvestment. Now, given the fiasco it has experienced this financial year where it raised nowhere near the target, what are the chances it will do better next year? Well, the way the government has been going about disinvestment is probably not the best way of going about it. I might be wrong but most of the activity seems to be concentrated near the end of the financial year. There can always be a year-long timetable. The markets may or may not be in a good mood during a short period. Second, is the way issue pricing is done and the role of merchant bankers. Clearly, this set of people can't shed the greed that used to come into pricing even till some years back. When you don't have an euphoric upturn in the market and people are looking for value, aggressive pricing is going to backfire. Next, UPA-II has allies and opposition who just about oppose everything as if there were programmed to do so. Opposing disinvestment will come naturally to them. The ruling party itself has enough people who have not been able to move ahead of 70's and 80's. But the mostt important part of disinvestment is how its proceeds are used. If they are to be used to support wasteful and inefficient expenditures, then is disinvestment such a good idea? I don't think so. 

DTC by Frontdoor or Backdoor?

Will the Direct Taxes Code (DTC) make it to the Budget later this week or we will see bits and pieces as some of us had been suspecting? The recommendations of the Parliamentary Standing Committee is now out. Call it the perils of living in a democracy that we have had to wait almost two years to reach where we have now. The delay has meant that many of the original recommendations such as that of slabs individual taxes look less attractive that what they would have thanks to high inflation. By telling the world that tax reforms are being pushed via application of DTC might shore up sentiments. This also gives some momentum to implement the indirect taxes reforms by applying the GST regime which according to some, will not see the light of the day till end-2013. Will the government take the plunge? Well, we all know that government decision making is not necessarily dictated by economic rationale that makes sense to many.