Is this Independence?

On the auspicious occasion of the 66th anniversary of India's Independence, I would like to express my deep anguish at the state of affairs in the so-called, world’s largest democracy. We freed ourselves from British rule in 1947, but, are ruled by corrupt politicians, bureaucrats, thugs and sycophants today. The values for which India has been praised by global leaders & thinkers for centuries, stand eroded and we are part of and witness to the shambles that surround us.

Here are some such quotes about India:

“If there is one place on the face of earth where all the dreams of living men have found a home from the very earliest days when man began the dream of existence, it is India!" ~ French scholar, Romaine Rolland

“India is the cradle of the human race, the birthplace of human speech, the mother of history, the grandmother of legend, and the great grandmother of tradition. Our most valuable and most astrictive materials in the history of man are treasured up in India only!" ~ Mark Twain

“We owe a lot to the Indians, who taught us how to count, without which no worthwhile scientific discovery could have been made!" ~ Albert Einstein

“India conquered and dominated China culturally for 20 centuries without ever having to send a single soldier across her border!" ~ Hu Shih, former Ambassador of China to USA

“She (India) has left indelible imprints on one fourth of the human race in the course of a long succession of centuries. She has the right to reclaim ... her place amongst the great nations summarizing and symbolizing the spirit of humanity. From Persia to the Chinese sea, from the icy regions of Siberia to Islands of Java and Borneo, India has propagated her beliefs, her tales, and her civilization!" ~ Sylvia Levi

If you felt your chest swell with pride as you read the above quotations, you are a true Indian and still take pride in our country. If not, please do not bother to read any further.

What our freedom fighters achieved for us after many sacrifices, sixty five years ago, stands in ruins today. A very capable and intelligent people who have made their mark in all walks of life despite grave adversities, are today at the risk of losing their freedom to corrupt manipulators who form the very system that is supposed to serve the people in a democracy. By definition, Government is necessary to the existence of civilized society. But unfortunately, rather than providing an infrastructure and framework to support its people, when those in power are only looking to further their own wealth and political interests, there is little hope for its citizens. We have seen several instances of politicians, bureaucrats and the judiciary, being investigated, accused of and arrested for rampant corruption over the past couple of years. However we are yet to see these very public servants being punished for their crimes, which is a clear indication of the fact that our system is already in an advanced state of decay.

In a country where parents think that giving a donation to get their wards admission in a reputed Kindergarten is perfectly acceptable, the very foundations of a generation are weak. Children are exposed to corruption at practically every stage, till they grow into corrupt adults. And nobody sees anything wrong with that!

It is high time that all of us patriotic Indians who cringe at the very thought of what is happening to our society, woke up and realized that we are to blame for allowing corruption to breed around us. We need to eradicate this evil ourselves, by not acceding to unjust demands or actions that are contrary to the interests of others in our society. We need to get the crooks and goons who have infested our system to realize that we are not going to tolerate them any longer and that we are not afraid of them, but, they need to fear extermination.

Let us not get carried away by the inflammatory speeches of those who seek power for themselves and only intend to use us as a means to that end. Let us shun violence and respect public property, as damaging it only diverts more of our scarce resources from the infrastructure, which is so essential for our growth. Let us respect the efforts of those around us who are making a positive contribution to the growth of others, as that takes our nation forward.

Let us all pause for a while in our pursuit of material assets and think how we can contribute to the change that we want to see around us. Remember none of us can survive in an environment that is poisoned. We need to cure it ourselves…

Jai Hind!

India's Shine Starts Wearing Off

In continuation of yesterday's post on the "Global Economy" is this one on the "Indian Economy", which forms Part-2 of my presentation at CRN Virtual Expo. India is surrounded by the same dark clouds currently, as the rest of the world. In the section which follows, I have attempted to outline various factors that have become a major source of worry, over the past year.


THE INDIAN ECONOMY

UPA-II completes 3 years in power

In the aftermath of various scams, exposure of various corrupt politicians and public servants and the Anna Hazare movement, the UPA-II government seems to have lost its ability to take decisions. A government whose arrival 3 years ago had been hailed by industry and markets; which was expected to take several long pending policy decisions without the fear of convincing its erstwhile Left allies – seems to have failed the Indian electorate miserably.

Several much awaited policies and implementations like the GST, Multi-brand retail, removal of subsidies on petroleum products and fertilizers, Banking & Insurance reforms are still in a state of suspended animation, while the government continues muddling though regressive policies on taxation of overseas investment retrospectively.

India's economic growth has slumped to a near three-year low and its current account deficit is the highest since 1980, a gap that is difficult to control when the rupee is at a record low. The government has projected a budget deficit of 5.9 per cent of GDP, which Moody's Investor Service says is credit negative. Inflation is the highest among the BRICS group of major developing countries and industrial production has contracted unexpectedly in March.

Industrial growth turns negative

India’s industrial production as represented by IIP index turned negative in March, falling 3.5% on the back of contraction in mining & manufacturing output. There was also a slowdown in electricity and capital goods output fell by 21.5%. The broad trend points towards a slowdown, with cumulative growth for FY 12 standing at 2.8% year-on-year as against that for FY 11 at 8.2%.

No end in sight to corruption & scams

In late 1989 a horrified nation voted out the ruling Congress & late PM Rajiv Gandhi on account of their alleged involvement in a 64 crore kickback from Bofors. Today, from the number of scams reported, even corporators and magistrates get paid much more and we are no longer shocked. Whether or not the CAG has its numbers right, the scams unearthed now have mind-boggling figures in comparison – From the  Rs. 176,000 crore 2G spectrum scam of 2010 to last week’s Rs. 1,070,000 crore Coal mining scam. Indian money in Swiss Banks is estimated at over US$ 1.5 trillion, which is more than its GDP. A lot can be done, but, will it?

Interest rates hamper new investment

With tight liquidity and high interest rates, businesses have drastically cut down on capital expenditure on new & expansion projects. This obviously brings down the business prospects of the feeder industries which are various suppliers & vendors, leading to a consequent slowdown in their business.

Policy paralysis adds to Industry woes

With all the hue & cry about corruption, honest public servants and fence sitters feel more comfortable holding back decisions on new projects & purchases, lest their actions are also probed by investigating agencies. As a result of this, the infrastructure & capital equipment industry is already reeling, while others are feeling the heat.

Inflation continues to bother

The steep fall in the Indian Rupee has increased input costs of imported components, commodities and equipment, at a time when the consumer is looking to cut expenses owing to double digit food inflation. As a result of this consumption is bound to suffer.

Outcome of recent  elections threatens stability of  Congress

After the recent 5 state Indian Assembly elections, in which over 24 million people voted, it became apparent that the electorate had lost faith in the ruling party. Possibilities of a mid-term poll loom large, with the fear that there is no national political party that seems ready to take over the reins of this country.

Oil prices big cause of worry

Among the largest users of crude, India lies roughly at the 12th place, using about 2 million barrels per day of which about 80% is imported. Worse, this demand is rising by an implicit 4% per annum, when the global demand is slowing down to about 1.8% per annum. The loss to our Balance of Payments in 2011 on account of crude imports alone was in excess of US$ 50 billion. Crude rises, we lose; crude falls but rupee also falls, so we lose again.

Foreign investors turn cautious

After the GAAR rules, the retrospective taxes sought to be imposed on Vodafone, Cairns and several other foreign investors, the revocation of one hundred and twenty two 2G Spectrum licences issued to operators like Telenor, Etisalat and others, FIIs have turned very cautious on India. They are unsure of what else could be revoked retrospectively and to compound their worries the fall in Rupee and Stock Markets has taken away most of the gains on investments made here in the past 5 to 6 years.

Not Out Of The Woods Yet

I was asked to speak on "The Global Economy: Threats & Opportunities" at the CRN Virtual Expo earlier in the day today - A topic close to my heart and always at the top of my mind. I put a few thoughts together on a PowerPoint first and then decided to delve deeper into them, so I could actually provide some valuable insights to the participants (most of them Entrepreneurs and CEOs) attending the Expo. 


The idea was to learn from past mistakes made by our world leaders and prepare ourselves for any economic fallouts of the current events, which are shaping our destinies. As I started listing these out, I realised how bad a shape the world is in. So here go some thoughts which tell me that we are not out of the woods yet...


THE GLOBAL ECONOMY

Shaky at best, since the US Housing Crash in 2007

The US Housing Market Crash of 2007 was the worst housing crash in U.S. history and resulted in the world’s most severe financial crisis since the Great Depression. The cause for this crash was like any other financial bubble, a result of greed, federal short-sightedness, financial innovation and poor regulation. It had its origins in the dot com bubble bursting in 2000, resulting in a shift of dollars from stock markets to housing. Cheap money available for new loans in the wake of the economic recession, made the Federal Reserve and Banks encourage people to borrow money against secured housing to help the economy grow. Financial innovation from lenders created new types of loans such as interest adjustable loans, interest only loans and zero down loans. This fuelled housing prices and the greed to make easy money got people to buy more by borrowing more, in an effort to take advantage of market conditions. With zero down loans to buy new homes, an unlimited supply of money was created. Each such loan was securitized by the bank, given a AAA Rating and the risk was passed off to someone else, notably foreign investors and pension funds. The total amount of derivatives held by the financial institutions exploded and the total % cash reserves grew smaller and smaller. Consequently from 2003 to 2007 the amount of subprime loans had increased a whopping 292% from 332 billion to 1.3 trillion. When credit markets froze in 2007, housing prices started tumbling from their peak, borrowers failed to repay their loans & the value of the security in a rapidly deteriorating, seller only market was inadequate to cover the lenders’ exposure.

Though the financial crisis was resolved by start of 2009 through some drastic & unforeseen measures by the US Federal Reserve & Senate, the housing market continued to decline throughout the year, with over 3 million foreclosure filings for 2009. Unemployment rose to over 10% and the housing market crash created the worst recession since the early 1980’s.

By 2011, after two rounds of Quantitative Easing in the US,  apparently the US economy had stabilized and was on a growth path with unemployment numbers coming down, GDP growth and corporate earnings recovering, even though housing prices were yet to recover and there was still a surplus of housing inventory.

Nascent recovery, nipped in bud by Europe Crises

These greenshoots of economic recovery were threatened by the unfolding of the Economic Crisis in Europe, where country after country reported a fall in GDP and was unable to meet the huge fiscal deficits that ensued on account of increased government spending in the aftermath of the US economic recession. The various causes attributed to the EU Crisis are the 2007–2012 global financial crisis & the resulting recession;  international trade imbalances; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bailout troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

The underlying reason however, remains the greed of people and nations in tapping the availability of over US$ 70 trillion of global savings of fixed income investors in search of high yields overwhelming the policy and regulatory mechanisms in country after country, generating bubble after bubble across the globe. While these bubbles have burst causing asset prices to decline, the liabilities owed to global investors remain at full price, generating serious questions regarding the solvency of governments and their banking systems.

The PIIGS (Portugal, Ireland, Italy, Greece and Spain) as we know the failing European nations thus far, have created their own recipes for disaster, that threaten to break up the European Union. In Ireland, banks lent huge amounts of money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts of the banks losing an estimated 100 billion Euros. In an effort to mask its growing fiscal deficit Italy from EU, Italy circumvented Treaty rules and debt levels through the use of complex currency and credit derivatives structures. In Greece, the government gave out extremely generous pay and pension benefits to public workers while hiding its growing debt from EU officials with the help of derivatives designed by major banks. In Spain, the crisis was generated by long-term loans (commonly issued for 40 years), the building market crash, which included the bankruptcy of major companies, and a particularly severe increase in unemployment, which rose to 22.9% by December 2011- all contributing to a negative GDP growth of -4.6% for 2010.

Most other constituents of the EU have similar problems at hand and despite the 1 trillion Euro European Financial Stability Facility or sovereign bailout, the fear of financial contagion is very real.

Recent downtrend in China real estate looks ominous

It is believed by many that China’s rapid development of infrastructure and recent GDP growth in excess of 9% make it the showpiece amongst emerging BRICS markets and are a result of meticulous planning and execution. It would be interesting to learn that China’s growth story revolves around property construction as much as its exports and domestic consumption. 

Local Chinese governments have mounting debt to fund infrastructure projects of 10.7 trillion yuan ($1.7 trillion) and depend on land sales to fund payments. According to sources, debt in Local Government Funding Vehicles amounts to around one-third of China's GDP. According to the China National Bureau of Statistics, property construction accounts for more than 13% of China's GDP (up from around 3% of GDP in 1999). Bank deposits are low yielding and the borrowing rate is either very low or negative which encourages explosive loan growth (also known as a debt bubble) and this has been prompting the locals to invest in property. By now many who could borrow have bought more than one property, which remains unoccupied due to high availability of new & under construction properties, and costs money to maintain.

However, starting September 2011, the demand for property started falling with many new projects being offered at 20 to 30% discounts by the developers. Certain markets fell by 30% in November alone, and by now have resulted in losses of as much as 50% over the past 6 months.

This looks ominous for the growth of the Chinese economy & its banking system, which UBS believes has an exposure of as much as 50% of its books to the Chinese property market. Remember, just like the subprime disaster in the US, the Chinese economy has wrapped itself around its bloated property market… so if it crashes, the whole system could come tumbling down.

Dark clouds of another oil war in Iran

Iran wants nuclear power and possibly the capacity to build a nuclear weapon; which is unacceptable to Israel and the U.S. Following the U.S. invasions and occupations of Iraq and Afghanistan, Iran has emerged as the principal power in the region, capable of further destabilizing either of its war-torn neighbours. The US has imposed sanctions including an oil embargo on import of crude from Iran, while, Tehran has led a move to ditch the U.S. dollar as the standard currency of exchange in the global oil market and cutting off supplies to France and the UK.


US President Mr. Obama, speaking at the American Israel Public Affairs Committee, in early March has declared that he would not tolerate a nuclear-armed Iran and would act — militarily, if necessary — to prevent that from happening.


If the situation spins out of control in any of several possible directions, oil prices could shoot to $200 a barrel. Of course, the downside of open hostilities could throw the entire Middle East into chaos and it is conceivable that even Russia and China could be drawn into the conflict in some way.

Fiscal deficits a big challenge for most economies 

Over the years Governments across the world have been mounting expenses by building unwieldy bureaucracy and appeasing public servants with wage hikes, while simultaneously reducing tax burdens and lavishing sops on the electorate. While this kept everyone happy as long as the economy was growing, it has thrown up several challenges with recessions & slowdowns over the past few years.

Amongst the OECD (Organization for Economic Co-operation and Development) some countries had severe deficits in 2011, including a -10.3% deficit in Ireland, -10% in United States, -9.4% in the UK, -9% in Greece and -8.9% in Japan.

Countries with high sovereign debt, fiscal deficits and contingent liabilities, in particular, are at risk of contagion, but current heightened market-uncertainty is leading to flight-to-quality, which could raise rates across countries. Credit Default Swap (CDS) spreads for Greece, Spain, Portugal, and Italy jumped to fresh record-highs and this year’s gains on global equities have been wiped out. Worries about elevated European debt, tightening credit, and Euro Zone cohesiveness led to further depreciation of the euro, which has hit a 14-month low against the U.S. dollar in May. Benchmark U.S. Treasuries have surged on a general flight-to-quality, which if sustained would lead to higher borrowing costs across nearly all countries. Already elevated sovereign debt levels are likely to rise over the near-term across many countries, given the degree of fiscal deterioration since the onset of the crisis.

Political unrest in several countries

Since the Second World War or probably the disbanding of the erstwhile USSR, the world has never seen as much political unrest as we are witnessing since 2011. Blame it on the loss of jobs, economic disparity, inflation, corruption, religion or systemic decay of governance – the economic crises that has swept the world since 2007 has resulted in political unrest of a magnitude not witnessed before.

What started in the troubled Middle East and African region spreading through countries like Tunisia, Egypt, Libya, Bahrain, Syria, Yemen has now reached Greece, Italy and Spain. In some countries at least, particularly those with upcoming elections, worries over further unrest will deter the government from more aggressive reforms. The propensity for civil unrest in France, Spain, Portugal and Italy will act as a check on their governments.

From the looks of it, political unrest will do nothing but increase throughout 2012 all over the world. Driven by labour groups, youth organizations, political parties, bloggers and tweeters and the poor and unemployed, we may see a growing movement of discontent. People will be demanding socioeconomic and political change. They will be protesting the things they don’t have and the things that are being taken away from them. People everywhere seem to be seething with discontent under the surface. They are angry at corrupt regimes regardless of where they are in the world.

Volatile commodity & currency markets

Building a business in volatile markets is one of the biggest challenges facing most global businesses ever since 2007, when volatility in both commodities and currencies reached new heights. We have seen crude fluctuate from US$50 per barrel in 2007 to US$146 in 2008, down to US$32 in 2009 and back to US$126 in 2012. Other industrial commodities like Copper, Steel, Rubber etc have seen similar swings. Gold itself has been equally volatile moving from US$640 per ounce in 2007 to US$1890 by late 2011, before falling to levels of US$ 1550 currently.

Rapid fluctuation in currencies on account of global funds alternating between seeking higher returns in emerging markets prior to returning to the supposed safety of the US$, have kept policy makers and businesses on tenterhooks. The Indian Rupee itself has fluctuated between 39 to over 56 to a US$ in this period, making the smartest & largest of Indian businesses with any international exposure lose large sums in currency fluctuations.   

Ending Corruption in India

I have no doubts about the intelligence of Indians and the fact that the vast majority of us are against corruption and interested in the nation's growth and prosperity. However, despite all the attempts being made by the Citizens and the various political parties in the country, I read a lot of gibberish & see no major ideas coming forth that could vanquish Corruption & Black Money from India in a short period of time.

May I suggest 3 simple measures that, if implemented, would bear results in no time?

‎#1. Give the nation 5 days to deposit all currency notes in denominations of Rs.500 & Rs.1,000 in Banks, prior to demonetizing these notes. Banks would be required to issue Debit Cards of equivalent value against the deposits received to the respective depositers. PAN Nos. of all depositers must be taken prior to issue of Debit Cards, and those without PAN Nos. should go through the UID process viz. biometrics, photographs, residence proof etc. prior to being given a claim on the funds deposited by them. The list of all deposits and depositers (with PAN Nos.) must be furnished by the Banks to the RBI (Reserve Bank of India) and the Income Tax Deptartment. Thereafter, no currency note of a denomination exceeding Rs.100 should be put back in circulation, as all transactions involving higher amounts would be through Debit/Credit Cards only and through Banking Channels.

Result: End of Black Money, Inflation & Counterfeit Currency in one stroke; while GDP & Tax collections would shoot up.

‎#2. Any payments made in excess of Rs.1000 in Cash should be subject to TDS & must be accompanied by the PAN No. of person/party receiving the money. Issuance of a Cash Receipt should be made mandatory and in case such a receipt is not furnished, it should be considered a Crime & made punishable under the provisions of the IPC (Indian Penal Code).

Result: End of bribes & corruption.

#3. A last chance be given to any resident Indian with deposits in overseas accounts (largely Swiss Banks with an estimated US$1.5 trillion of deposits from Indians) to bring back the funds to India through a Special Amnesty Scheme whereby all the Funds would go into "Zero Coupon 10 Year Infrastructure Bonds" failing which all deposits/depositers would be investigated & imprisoned (if & when proven guilty) apart from such funds being seized. Upon maturity i.e. after 10 years, such amounts would be returned in Indian Rupees at the US$:INR parity prevailing then. This could take RBI's Forex Reserves up to US$1.8 trillion from the US$ 290 billion currently, thereby affecting the exchange rate of the Indian Rupee. I suspect that the US$ after 10 years may not be worth more than Rs.20 (hence, the Government would borrow at a current exchange rate of around Rs.50 to a US$, but, redeem close to Rs.20 to a US$), as with these funds & infrastructure in place India could record GDP Growth in excess of 15% per annum consistently, and become the second largest (if not the largest) economy in the world by the next decade.

Result: Huge build up of infrastructure at a very low cost & consistently high GDP growth accompanied by the strengthening of the INR and bridging our balance of trade position.

WHERE THERE IS A WILL THERE IS A WAY!