India's next IT boom! FDI in retail sector

Prime-minister of India has made his stance very clear on FDI on retail sector. No Roll Back. Financial Thoughts salute him; and frown upon other myopic politicians who cry for roll back.

Financial thoughts believe this is one of the boldest decisions in India after the introduction of IT in late 1980s. During those days, I was in higher secondary school and when I used to visit Canara Bank branch where my dad was the branch manager, I had to wade through the protestors sitting with placards saying "Down with Computers! It takes away our Jobs".

This type of protests was common in front of banks, telecommunication offices and several other government offices. Communists and BJP were among the protestors. Congress stood behind the changes as it was introduced by Rajiv Gandhi. There were a few incidents where the protestors even turned violent and smashed computers. 

Now the history is repeating with FDI in retail sector. Let modern retail sector come to India. It will do wonders for Indian farmers. Now most of the perishables like vegetables get lost in transportation because of decay, etc. Hardly you can see a refrigerated truck in India. 

Moreover, the middlemen and traders ensure that the farmers live in poverty and they don't get the reward of labour. About 70%-80% of the value creation is eaten away by the greedy middlemen. It is they who protest! just as the lazy workers in the 1980s!

Did India lose because IT and Computers came to India? Didn't a new middle class of IT professionals boomed in India, fuelling consumption, which augured well for Indian economy and stock markets? Did the computers added jobs or took it away! As you know, it added millions and millions of jobs - the jobs that took India's fame across the world. IBM, Microsoft, CISCO and a lot other multinationals opened shop in India. No one complained?! 

Let us support at this juncture the bold decision of Dr. Manmohan Singh. It will create a sophisticated middle class in Indian rural sector, which will get their better reward for their produce and labour. It will improve India’s farm productivity- which is among the lowest in the world now. Let Walmart, Tesco and others open shop in India just as IBM and Microsoft did. That will propel India's growth to new levels. Of course, there could be some job losses - but like the IT and Computers, new jobs that will be created will be 10 times of what is lost.

Nasty Euro (Part IV) - Will Game Theory help to solve Eurozone crisis?

Just a few weeks back, the media was full of news of energetic Sarkovsky and enigmatic Merkel meeting together couple of times in a month and admonishing Greece. But now, both are at logger heads.

Whilst Germany (Merkel) supports Austerity Measures as the way out of crisis of Italy, Greece and other Eurozone countries, including France, who is most affected by Italy and Greece. France disagrees. They believe ECB must support these countries with European version of Quantitative Easing.

The result is there is stalemate, resulting in strong rumours and speculation that the time of Euro is over -it is just  a matter of time the modern "Continental System" of Euro collapses.

Let us see whether Game theory (a mathematical method for analyzing a person’s success based upon the choices of others) can help to find some solutions. It is reputed that Gordon Brown of UK used Game Theory to solve some of the problems, when he was heading the Finance of UK, during the premier ship of Tony Blair.


For those, who are not familiar with the theory of Game theory, let us explain with an example. One of the canonical examples of Game theory is called “ The prisoner’s dilemma”. This shows why two individuals might not follow the most logical action, even if it appears that it is in their best interest to do so. The example of the prisoner's dilemma is given below:

Problem: Two stupid men are arrested for some crime that will put them in jail for 1 year as maximum prison term. But the police do not possess enough evidence to convict them. After separating two men, the police offer both a similar deal- if one testifies against his partner (assists police), and the other remains silent, the testifier goes free and the other receives the full one-year sentence. If both remain silent, both are sentenced to only one month in jail for a minor charge. If each acts stupid, each receives a full 1 year sentence. Each prisoner has following choices (i) either to assist police or (ii) remain silent. What should they do?

The beauty of Game Theory problems are that it is not mathematical. There is no mathematical accuracy in the answer. This is the sort of decisions finance managers and economists face.

Coming back to the problem, each player is concerned with lessening his time in jail. There is a chance that they would want the other to get maximum prison term, both will testify against one another and the result is maximum sentence for both. If they help each other, taking others interest also into account, they will get only one month each, as police don’t have the evidence. In the game, if the sole worry of the prisoners seems to be increasing his own reward (i.e. selfish/egoistic), then they would get one year each. The interesting aspect of this problem is that the logical decision leads both to betray the other resulting in maximum prison terms. While illogical decision not to pursue own interest (of going free) would result in maximum common benefit (both gets just one month prison term) and hence the best choice for both

Applying the above situation to the Eurozone, France and Germany has following options:

Option 1 – Both Germany and France agree to implement some austerity and ECB involvement.

Option 2 – France is forced to go in with German policy

Option 3 – Germany is forced to toe French policy

Option 4 – No agreement between France and Germany. At the time of writing of this article, (21 Nov 2011), both has adopted Option 4.

Using the basics of game theory, the pain of both France and Germany and Eurozone at large will be solved by following the Option 1. All other options involve maximum prison sentences! i.e. Eurozone recession, unemployment, losses for companies and hence to banks, lack of business confidence, lower tax revenues, etc. would be some of the symptoms of this punishment.

Foolish Rate Hike (Part II)

On 26 Nov 2006, a few terrorists landed in a boat in Mumbai and began to attack the economic centres with an aim to bring havoc to Indian economy. They shot down business leaders and foreigners in historical Taj Hotel of Mumbai and a few other five star hotels, besides running amok in the City shooting and killing. They hoped that this will do damage to Indian economy, reduce its growth by scaring away foreign investors and dreamt about loss making Indian companies and a disillusioned population, amongst others.

India brushed aside this incident and marched ahead.

However, what terrorists could not accomplish RBI has achieved!

India once became tantalizingly close to 10% growth p.a. However, RBI beat Don Quixote (who found wind mills extremely dangerous fighters!) in seeing a monstrous threat in single digit inflation level and began to adopt such drastic measures that appeased those who were envious of India’s growth. The leadership of RBI must be able to think independently like Mr. Reddy did when he said no to the aggressive lobbying to allow funny credit derivatives in India.

Why was RBI in a hurry to raise interest rates to beat inflation, when the inflation was mostly caused by oil price hikes? It was evident that blindly copying text books don’t help. As Financial Thoughts highlighted last month, India needs more supplies – just by choking demand, the RBI kills the economy. And it seems that it is almost happening.

The recent economic data shows that the industry production is the lowest in the recent past. Who will go for expansion when the interest rates are uneconomically high and no feasible business transactions is possible? The result is that as expansions are curtailed, there are lots of signals of CAPEX declining. Capital goods production number within the recent IIP was negative 6.8%. As investments in the economy drop, the accelerator and multiplier effect works against the economy. Economic activities drop or dry up. Result is the sharp drop in turnover and profits while interest burden increases. No wonder many companies reported losses in the last quarter (Terrorists who hate India must sent a Thank You note to RBI).

Many say by next quarter, the banks will have higher NPA and the banks shares could drop. Not only that the banks will get scared and reduce lending. That could send the economy into another downward spiral (Well, Terrorists who hate India must sent another Thank You note to RBI)

Add to RBI’s fight against some imaginary hyperinflation, we have one of the most inefficient and corrupt government at the Centre. (When Vajpayee Govt. came to power, for the first time they identified the need for modern roads in India. If you drive at 100km p/h in three or four lane roads in North India, you must remember gratefully Mr. Vajpayee for his vision of linking the corridors through highways. This unleashed lot of investments, CAPEX and filled the pockets of millions of Indians resulting in an economic jump start that catapulted India into high growth from the so called low Hindu growth rate).

All governments that ruled India for more than 64 years (post- British Raj) are answerable to this - their record is just slightly better than British Raj. The Raj also brought in railways, telecommunications, electricity, etc. However, they governed India for their benefit and their Indian associates. Similarly, the post-independence rulers governed India for their benefit and their associates. That is what evident in the corruption and the corrupt politicians have enough connections to walk away with the ill-gotten wealth. British Raj shifted the most of the Indian wealth back to their country, while a bulk of the post-independent India’s wealth is being shifted to Swiss banks and other secret accounts. Although there is cry in India to bring back the wealth, it won’t happen because the ‘fox is the watchman over the pen (i.e. hen house)’.

One of the chief reasons for inflation and declining growth is the Government inertia. Plenty of of projects are being stalled by government departments or denied environment clearance or land acquisition issues and so forth. It saps the energy of Indian entrepreneurs and it impacts the economy.

What no one speaks is the Indian unemployment (already it is more than 20%-25%). The slowdown in the growth results in lesser opportunities. Frustrated youth will get more frustrated! But most of them will blame it on their unknown crimes of the past birth for this life’s troubles!. That is the Indian philosophy. They usually blame their previous birth for the troubles. That is, by the way, a good escape mechanism.

Financial thoughts believe, risking a little inflation and environment is nothing but a calculated risk for India’s growth, well-being of its population by having employment creation, more job opportunities, better price realization for agriculture produce that augur well for its farmers & farm labourers and overall wealth creation.

This means taking the risk of taking some criticism and blame in the foreign media and so called foreign ‘experts’, but Financial Thoughts it is worth taking this risk.

Overall, the situation is not out of totally out of control yet. By initiating steps to reduce the financing costs on borrowers and boosting the economic activity by favourable RBI policies (including immediate slashing of rates) and speedier action by Govt., Indian can still retain its 7.7% growth for current fiscal and ensure growth rates above 8% going forward.

Let us hope for the best!

Or let us emulate French Gunners (French Artillery was best in Europe those days) at Waterloo battle when Napoleon’s stupid decisions ensured that the battle was slipping away from them. Unable to do anything else, history records that that the French Gunners wept!!

Nasty Experiment Called Euro (Part III)

Financial thoughts have been warning about the fundamental weaknesses of Euro creation and the problems it causes to Eurozone and rest of the world. It seems that after Napoleonic Continental System introduced in Europe in early 1800s, Euro is the most unstable, inconsistent and unsustainable proposition Europe has seen.

Under the burden on unbearable terms of Continental System, Russia broke away from  the system in 1810, triggering a massive war that has not seen by the world till then. The war achieved a reverse result. Russia seemed weak and was about to get defeated by Napoleon's aggressiveness, instead the passive strategy of Russia paid off in the end.

In the new gamble of Euro, the Russia's role is taken by Greece, who - just like Russia in 1810- cannot bear the terms of agreement of Euro. Like Russia it has no other option but to break the agreement. In 1810 it brought about the wrath of Napoleon on Russia.

From 2010 onwards, Greece is playing Russia’s role of 1810. Recently in late October 2011, Germany and France led a marathon meeting once again that last about 11 hours. One of the results was the announcement of a package for Greece. Instead of agreeing to it, the Greek prime minister put it for referendum, attracting the wrath of France & Germany. This time, Europe does not have a single, mighty, powerful genius like Napoleon, but has several midgets making it for him. They are turning the anger on Greece!

Two hundred years back, it would have been seen by the world that a meek Russia is about to baulk down at the pressure of mighty Napoleon. However by early 1813, it was evident that the glory and mighty days of Napoleon was over as the white winter licked him while Russia stood battered but intact! In the same manner, it may appear now that meek Greece would bow down and the Eurozone powers will bask in glory. But as the currency unsettling battle is emerging in the Eurozone with major European powers try to kick Greece into economic humiliation , little do they realise that it could be the tame end of another 'Continental (currency) System' much like Napoleon’s grand inconsistent and unstable Continental System.

Inconsistencies of Euro are many and well written – i.e. (1) monetary union without political union does not provide any cohesiveness, but a nightmare (2) it is just ludicrous that Eurozone has one currency but different states have to borrow at different rates. Whilst Germany borrows at low rates, Spain and Italy have to pay high interest rates. (Just imagine what it would be like if Delhi state of India borrow at low rates while West Bengal is forced to pay high interest rates). (3) Eurozone has one single currency but has several states with different credit ratings. So, how do you decide currency rating level – someone told me that Euro has mainly replaced Duetshe Mark and hence, one need to look at Germany. Is that true? (4) Why does Germany and France take major role in talking about Euro, what about the rest of the 20-odd states that is supposed to be part of Euro. Is there a class system in action?

Well some of the inconsistencies may not appear immaterial, however no one can deny that there some strong inconsistencies do persist!!

Hold your breath – as the financial markets of the world will go for a tailspin as modern “Continental System’ is preparing itself to break up. Do take a hard-look at your portfolios and decide - this black swan may decide to appear sometime in the near to not so distant future!