Discussion on rate hikes that killed Growth

Recently RBI Governor (RBI-G) D Subbarao addressed IIT-Kanpur Alumni and made some observations. http://www.moneycontrol.com/news/economy/5-6-growth-not-sufficient-says-rbi-governor_833324.html In fact RBI-G is admitting that his own policies since 2011 were wrong! Financial Thoughts(FT) have taken the key sections of the speech and provides some comments, which are captured below:

RBI-G:  “Growth rate of 5-6 percent is not sufficient for the economy, which has the potential to grow at double-digit rate provided some issues are addressed”

FT Comments: To achieve growth, proper monetary policy is needed. The interest rates have to reduced - which RBI had increased during 2^nd half of 2011. Since then the growth rate was on the downward trend. Correlation between rate hike and slowdown is well established.

RBI-G: “Pointing out some of the long-term challenges for the growth, Subbarao said there was a need for stable and predictable macroeconomic environment, removal of infrastructure deficit, skill improvement and job creation. He said there is also need for raising agriculture productivity, and improvement of social sector outcome.”

FT Comments: RBI clearly failed in this. Whilst RBI is supposed to be a guardian of foreign currency exchange rate, they have failed abjectly. Once $: INR was stable around Rs45/- now it has touched Rs55/- and it may fall further resulting in higher cost of fuel, which drives the economy. See the link http://www.financialstrategyonline.com/2011/12/rbis-smart-moves-taking-india-down.html On another blog post dated 21 Oct 2011 Financial Thoughts had screamed as follows:

“Those who support further indiscriminate rate hikes must go back to US in 2006 when US Fed was blindly hiking the rates in pursuit of a mirage, which achieved nothing but a fantastic economic collapse in 2008”

RBI-G: "We are quite happy that India is growing at 5-6 percent, but I must tell you that is not sufficient. That is much less than our potential ... unless we grow at 9-10 percent year on year for about 10 years we cannot pull hundreds of millions of people out of poverty," 

FT Comments: Totally wrong! In fact many Indians are unhappy in way things are mismanaged and brought to this level. 

RBI-G: "India consists of the largest number of poor people in the world. India has more poor people than the entire economy of South Africa," Subbarao, who is also an alumnus of IIT Kanpur, added.

FT Comments: For the sake of poor, put the economy back on track on 9% growth rate. Studies have proven that since liberalisation in 1991, the Indian Poverty has dropped because of the growth in the economy. Even slums in India have a TV set and two wheelers which during 1980s was the luxury of middle class. Post liberalisation, middle class migrated to four wheeler, however it becomes unbearable now due to the hike in fuel costs, thanks to RBI whose foreign currency management has exacerbated the issue. 

RBI-G: “Inflation is still high and stubborn. Balance of payments is under stress. Decline in investments is a worry. Investments not taking place today, that's a worry," 

FT Comments: Very sad to hear this as the interest rates were hiked in the first place to curb inflation!! Secondly investments will not take place if the debt finance is costly.  Thirdly with the slowing growth in India, there are other countries with better profitable opportunities as far as FII and FDI are concerned. FII and FDI deploy their capital not for charity; but for profit. Right now, India is not the second fastest growing economy but the third or fourth!

RBI G: "So people worry whether we have got derailed from the high growth trajectory. My short answer to all those questions is that the India story is still intact and India's growth story is still credible," he said.

FT Comments: Whilst Indian Growth story is still credible, we wait for a radical change in RBI policy or a new RBI Governor similar to Bimal Jalan to rekindle growth in the economy.

Financial Thoughts also believe that Narendra Modi, who has an excellent track record in ruling Gujarat must be given a chance to rule from New Delhi. Whilst many will point out to 2002, Financial Thoughts would like to point out to the role of congress leaders during 1984 massacre in New Delhi.  Financial Thoughts do not support any type of massacre or violence (as it reminds the chimpanzee past of humans!? Real humans are more evolved and sophisticated and do not indulge in violence – learn from Mahatma Gandhi or Martin Luther King)

With Modi at helm, the probability of India growing at 10% and becoming an attractive investment destination of the world would be a reality.

Why India needs a bolder RBI - not a timid one!

The recent news highlights that corporate India is moving slow and records slower growth and profits. Someone should give some boost to the real economy and Financial Thoughts believe RBI has big role to play.

One of the reasons for this dismal performance is traceable to RBI’s macro monetary risk management.

India had once became tantalizingly close to 10% growth p.a. However, RBI saw monstrous threat in single digit inflation level and began to adopt drastic measures and began to hike interest rates during the second half of 2011.

Why was RBI in a hurry to raise interest rates to beat inflation, when the inflation was mostly caused by oil price hikes? It is evident that blindly following standard prescriptions don’t help.

As Financial Thoughts had warned http://www.financialstrategyonline.com/2011/11/foolish-rate-hike-part-ii.html in 2011, India needs more supplies – just by choking demand, the RBI kills the economy. And it has proven true.

Current poor economic growth and corporate profits is due to RBI policy. Whilst RBI may point their finger to Govt. policies, no one can deny that RBI had played a big role in making the Indian growth rate pale in comparison to what China, Indonesia, Philippines, etc. have achieved. All these countries also import  oil!

The recent economic data such as GDP growth, industry production, unemployment, etc  are the worst in the recent past. 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!

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, the CAPEX had declined. Investment in India has reduced ever since RBI has hiked its interest rates!

Have a look at the Capital Goods sector index of NSE/BSE and it will show the result. As investments in the economy drop, the accelerator and multiplier effect works against the economy. Economic activities dropped & dried up. Result is the sharp drop in turnover in many corporates and profits while interest burden increases. No wonder many companies reported losses since the interest rate hike began.

Then the banks suffered as the corporates struggled to settle and service the loans they took from bank. Most of the banks reported higher NPA and the banks shares dropped. Leading banks such as Canara Bank, Bank of Baroda, Corporation Bank, Andhra Bank, etc. all reported lower profits. Other banks did more or less the same. Now the banks will get scared and reduce lending. That could send the economy into another downward spiral. RBI induced vicious circle?!

To put salt to the injury caused by RBI policy, now RBI has tightened the rules of restructuring the debt and have recommended policies that will hurt banks further. It may be noted that RBI played a role to bring woes to the corporate world, which in turn affected lenders (banks) and borrowers (corporates). So they resorted to restructuring, which RBI didn’t appreciate.

Come on RBI! – Please give some respite!

Eurozone also suffers from inflation similar to India, but European Central Bank is more growth focused and has managed the macro monetary risks in a better manner. Despite fears of inflation, they have eased the monetary policy during early 2012. RBI should step in with monetary easing to further aid the economy and boost growth.   

India's current account is a critical macro risk and trade deficit numbers indicate that India has a trade deficit of USD 240-250 billion per annum. These are met by portfolio flows – FII and FDI – and it is in the better interests of India that we have good growth and profitability .

Hope RBI will slash the interest rates by1.5% to 6.25% during its next policy announcement. 

Financial thoughts believe, risking a little inflation is nothing but a calculated risk for India’s growth, well-being of its population by having more output, more employment creation, more job opportunities, healthier banks, increasing profits, more direct tax and indirect tax revenue for Govt., improving stock market, attracting more FDIs and FIIs.

Real USA & Currency Wars

USA Story

One of the countries in the world is characterised by extreme income inequality and health inefficiency.

Which country is this?

Someone may think this is the hall mark of an underdeveloped country. Well it could be.

However the above feature is attributed to US Economy, which is supposed to be the wealthy and robust and model of wealth distribution.

If you don't believe, please refer to financial times dated 23 Jan 2013. The link is given below (see the 5th para of the article)

http://www.ft.com/intl/cms/s/0/dd2d89f4-63c0-11e2-af8c-00144feab49a.html#axzz2IsbMUPSs

Whilst Obama is intelligent and took out US biggest threat Bin Laden without any loss of US life and that too in a foreign territory without their permission, USA's tryst with terrorists is far from over. They are expanding in Afganisthan and nearby areas and spreading across North Africa. Terrorists are taking classes on their ideologies, more terrosit teachers get recruited, more youngsters get trained and learning hatred which different from their ways and of course practices bombing techniques.

History may rate Obama as a Chamberlain if he continues to avoid strong policies and try containment or appeasement of terrorists - just as Chamberlain thought of Hitler

Currency Wars

Well currency is the invention of human kind for facilitating the exchange of goods and services. However, it has recently become a powerful political tool as well.

When USA thought Euro is going to a threat, so Goldman Sachs over financed Greece which spelled trouble for Euro. This trouble will end only with the collapse of Euro. Over-Financing Greece was a brilliant currency war strategy.

China's permanent currency – Renimibi - policy is keep it undervalued; but this has caused trouble for its arch-rival japan whose exports suffered in the past decade.

So finally Japan is taking an action as its exports suffered by the devaluation of Euro and Renimibi and other currencies of their competitors in exports.

Hence there is a possible battle of currencies in the horizon - Japan is facing accusations that it is trying to revive its economy at the expense of its trading partners (or competitors ?). Bank of Japan’s move to ultra-loose monetary policy is expected to invite similar action by other central banks - mainly by ECB. Within Eurozone, it is Germany who is concerned the most because they are the beneficiary of Euro and Euro vs. Yen disadvantage will impact Germany more than anyone else in the Eurozone. Italians muse the good old days of Lira which they could have devalued at their leisure and get more tourists or export their exclusive ceramics, etc. and increase employment in the country. Now they can't do that.

Well, has anyone heard Germany criticising about China's policy to keep its currency undervalued? We have heard about noises by USA on Renimbi undervaluation. This is because Germans export a lot to China. But USA faces lot of imports from China that killed several US industries, which in turn resulted in US unemployment.

Steel Bubble

We are reaching the end of 2012. A few days left in Dec 2012, before the new year sets in. The good news is that most of the stock markets will record a year of gain and hopefully many investors will walk into the New Year with a smile.

Many steel traders may also look forward with hope as major steel companies such as Arcelor Mittal (MT), etc. have witnessed some revival in its share prices recently. MT which touched USD 100/- per share in mid-2008 had crashed to sub-USD 14/- levels along with the collapse in steel prices.

It is an interesting story. Not only had the shareholders of MT faced a bumpy ride, the volatility in steel prices during 2007/08 period made many a steel trader bankrupt in 2008/09/10.

Steel Bubble

Steel prices which stood at $500 level in Dec 2006 touched $700/- record high in Dec 2007. Thereafter it zoomed to $1540 by July 2008, at the peak of commodity bubble, as evident from the chart below.

Source: mesteel.com

The problem was that many a normal ‘steel businessmen’ caught up in this whirlwind of speculation and when the bubble deflated by late 2008 to $480 levels, found themselves bankrupt!

Reasons for Steel Bubble

There were stories of steel becoming scarce due to several reasons – booming construction all over the world (GCC, China, US, Spain, etc.) which itself was credit fuelled.  Many businessmen switched to steel trading enticed by the profits and stories, which included that the entire years production of steel mills being pre-booked, etc.  Moreover those were crazy times of credit fuelled inflation!!

Real life example

There is a reason why I write this now. After a gap of about three years, I met an ex- CFO of a steel trading company, who reminisced about the crazy days off 2007 and first half of 2008. In fact from 2005 onwards, the steel prices were on the uptrend and it is like the gold prices of today. Just one way direction!

Attracted by the uptrend since 2006 many business men diverted their capital (exiting perfume manufacturing, textile retailing, etc.) to the lucrative steel business. Together with the credit facilities, they bought and stocked more steel which became almost like a precious metal.

Regular steel traders panicked and also began to stock more. And a borrowing customer (during my banking days) decided to do exactly that – hold more stock in view of the booming prices, which was supported by the research conducted by experienced purchase managers and industry experts. However, when the market crashed, the CEO, CFO and the Head of Purchase and Sales found it difficult to offload as the demand suddenly vanished. The aftermath of holding substantial inventory with borrowed funds in a crashing market is quite predictable! The proud CEO of this company, who was once chased by Private Equity (PE) firms with attractive offers, was humbled as he agreed to rather humiliating terms set forth by creditors (including banks) to restructure the credit facilities he took to finance his overpriced stock.

It took several years for the company to stand on its feet. He was lucky to survive as many of his competitors had either fled the UAE or faced jail terms for not settling business dues.

Strategic Plan

One of the large companies in the UAE recently faced a problem – whether to expand or not. We got in and conducted strategic study. I had the privilege to take an hour’s presentation to the ultimate decision takers- Board of Directors, who quizzed me with sizzling questions as Board was not so keen with the expansions while the top management was full of enthusiasm as they were more confident due to market awareness and day to day operational challenges.  Our solution which was best suited for the company was accepted by both Board and the top management wholeheartedly.

Is, strategic plan an isolated event which companies undertake once in a while?

Strategic management process is an ongoing process that evaluates and controls the business and the industries in which the company is involved. It includes assessment of its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment. The Strategic Plan will enable understanding of the key drivers of the market, its growth, market size, demand/supply balance, etc. Ideally, the Plan must have steps to identify areas linked to economic growth - to ensure that the performance of the company is in line with the economy.

Usually, it includes the following steps:

·         Evaluate current performance results

·         Review corporate governance

·         Scan the external environment

·         Analyse strategic factors (SWOT)

·         Generate, evaluate and select the best alternative strategy

·         Implement selected strategies

·         Evaluate implemented strategies

Strategy management may consider several options, depending upon the circumstance. It may include one of the following:

ü  Corporate Strategy-decisions regarding the flow of financial and other resources to and from a company’s product lines and business units.

ü  Directional Strategy-A corporation’s directional strategy is composed of general orientations towards growth

ü  Functional business strategy supports overall business strategy in much the same way that operational managers support upper top management. Marketing, human resources, logistics and production are all examples of functional areas.

Many organisations overlook functional strategy, which is very vital for efficient functioning of the business. It answers questions that impact a company’s competitiveness and efficiency. i.e:

§  Are you consistent with materials cost, labor and delivery?

§  What is the most cost-effective way to transport your materials?

§  Are you using social networking to target new customers?

§  Do you keep inventory flowing or work just-in-time?

§  What are your sources and scope of your competitive advantages?

§  Do you know your market position?

§  Is your brand easily identifiable from the competition?

(i) A courageous girl , (ii) US elections

Malala Yousufzai is just a teenager.... however she showed more courage than men in the northern region of Pakistan. Many parents wants good education for their children in the north Pakistan. Hope Malala's efforts brings a new light to the region, which a few centuries ago were beacon of knowledge and technology.
 
The place in Afganistan now notorious for Taliban - Khandahar - was known as Ghandara around BC2000-1000 and is mentioned in Mahabharata. The Ghandara kingdom played a crucial role in the power politics of Indraprasta (now known as Delhi). The battle of Kurukshetra (now in Indian Punjab) was due to the political moves of a gentle (or evil?) man by name Shakuni from Ghandara kingdom.
 
Then around BC 300-200, Buddism became prevelant and slowly the Hinduism gave away to the teachings of Buddism. The people of north Pakistan region and south Afganisatan became a mix of Hindusism and Buddhists and disseminated teachings and boasted about colleges that were the Cambridge of the world of those days (e.g. Thakshasila ). It seems that the world has forgotten the huge Bamiyan Buddists statues destroyed by Taliban a decade ago. Seleucus and Greeks who came with Alexander loved the beauty of the place and settled down. Remnants of Indo-Greco culture is still evident; although it is fading away.
 
Then around 1200, Islam arrived and the conversion followed; some accuse it was done by sword. Yet Islam was absorbed and of that born Sufism, which embodied the principles of life of the region. But Taliban is against Sufism.

Let us hope people of the region will show at least the courage of Malala and hope nowledge and prosperity return to that region.

.......................

US presidential elections are reaching the final lap. Debates are interesting. Somewhere I have read a comparison between George W Bush and Romney. That both are from rich families, got admission to the prestigious colleges because of connections, etc. Well any comparison with George W Bush, who presided over some of the disastrous period in US history starting with Sep 11 2001 and ending with Sep 15 2008 (Financial Crisis), any remote possibility of Romney repeating the same feat is unthinkable.


On the other hand, self-made Barack Obama, who got one of the worst jobs in 2009 has done reasonably well over the last four years and got Osama. In the month of March/April 2012, Times Magazine carried an article on how Obama decided to send commandos to pick up Osama - it was against all the advice by his generals and staff who preferred less effective course of actions. It was Obama's own decision and he oversaw it implementation. Times Magazine had praised the decision making approach and skill of Obama and the way the secret was kept as a secret. Most of his cabinet never knew about his multiple meetings and trainings by commandos.

 

 

Population Growth Dynamics

Recently, my daughter, studying in Class VI asked me a question- is India overpopulated? She learns that India’s population is around 124 crores or 1240 million. Suddenly, I recollected when I was studying in Class VI about 30 years back in early 1980s, India’s population was just above 60 crores or 600 million.

Doubling of population in 30 years! Wow – what will be India’s population 30 years from now– will it be 240 crores or 2400 million! Whatever the India’s population growth supporters say, that is huge number and the challenges will be enormous. The population dividend come with a huge bill to the government in terms of infrastructure, improving standards of living, education, utilities, etc. Even now about 30% of the population of the country is living without electricity and it is almost impossible to believe that will soon change. (Positive thinking persuades me to state that it means 70% of the population have electricity - which is twice the population of USA). A huge percentage of the population will be destined to be poor with low standards of living. Many may have to survive with just one meal per day. Criminal activity will increase, terrorist organisations will get more recruits and social problems will escalate.

Mumbai may be the best sample of India’s population. The City boasts several billionaires of the world, who find place among the top 50 richest persons in the world. There are millions of upper middle class in the City who swallows up luxury products and criss-cross the world. At the same time there are teeming millions of poor who eke out a day’s life. Criminal activity and underworld is active in the city. This social inequality is hard to change if the population continues to zoom. Often the middle/upper class don’t have more children; it seems that the lower middle/poor class tend to have larger families. A few miles outside the city, you get the best of the nature with lush greenery and scenic beauty. Similarly, India is blessed with natural wonders and thousands of years of history and monuments. But increasing population is a challenge –recently the reports of encounters with men and wildlife (e.g. leopards) are on the increase.Well, only the poor class suffer in this manner– the better off segment of the population is in safer places.

One of the reasons for the growth in population is also traceable to religious factors. Pakistan also faces a more severe problem. The fanatic religious leaders encourage more population for strange reasons (Jihad?) and the country is already suffering. Although there is illegal migration from Bangladesh to India, which adds to the growth in population, India continues to manage and accommodate. Pakistan also has got legal immigrants from Afghanistan and Taliban - who deny music, films and education to girls. India’s Mumbai equivalent city in Pakistan is Karachi which is a den of different relegious/political/underworld factions who kills almost one another every day. Recently, I had interviewed a bright candidate from Karachi who advised the sole reason for coming to UAE is the security reasons. He said his family is financially very rich and well off- but security is lacking in the City.

Coming back to India, the population growth in the country has huge disparities. Whilst the experts warn that Kerala state will face a situation akin to Japan within next 15-20 years with huge proportion of elderly population, most of the northern states continue to have large families contributing to the population explosion. This has led to a flow of migrant labourers into the Kerala state from distant regions such as Bengal, Bihar, Orissa, etc.

Overall, whilst the population growth may have its dividends, it comes with huge social costs as well. All responsible governments must be aware of the population growth has a diminishing marginal utility but increasing social costs. And the governments must take appropriate steps when the diminishing marginal utility (of population growth) curve meets the increasing social cost line.