Didi and the Hausfrau

Mamata Banerjee, Chief Minister of West Bengal, seems to have put paid to our government's plans to allow foreign direct investment (FDI) in the retail business. The Finance Minister, Pranab Mukherjee, has been evasive in replying to media questions about his government's intentions, but it doesn't appear that the UPA  has the mojo to take on both its partners as well as the opposition.

I saw the FDI announcement as untimely, given the fact that a dysfunctional, unruly parliament was in session. Under the circumstances, it could only be seen as a last-ditch effort to inject some positivity into the rupee, especially given that the RBI had pronounced it would not attempt to shore up our currency. Now that the FDI prop has gone, the RBI has stepped out and said it will defend the rupee. This may not work, especially with crude oil prices seeming more and more firm every day.

In Europe, Angela Merkel has the Eurocrat-socialist consensus in her thrall. The overspending, overpaid mob want to pile all the failures of bloated European government debt onto her plate, and get her to sign blank cheques and bank guarantees to pay for their sins. In response, Merkel's saying, "I'll pay the piper, if I can call the tune". This is not what they want - they want her to pay the piper now, and then 'help' her write the tune later. It's not going to happen - she has a parliament to run, and an electorate to respond to, and they have made their sentiments well known - no supporting lazy Southerners.

Whatever comes out of the European summit this week, its not going to be a Big Bazooka rescue for Europe.  World markets, which were riding on this hope, are going to be sorely disappointed.

But well before that, in the next couple of hours, we are going to see a sell-off in the rupee. The RBI may try to jump into the fray, but that would be ill-advised.

The Fed's steroid shot

Yesterday, the US Fed announced measures to inject liquidity into the European banking system, which has been desperately short of dollars over the last couple of months. Equity markets rallied, and the dollar dropped, prompting energetic buying of gold.

As Mohammed el Erian said, risk markets love liquidity injections. Makes me think of those who mainline heroin, and of quacks who give patients steroid injections when they don't have the ability or willingness to tackle the underlying malaise.

In this case, the underlying chronic ailment is the massive debt under which European governments are labouring, and the escalating price at which they have to finance this debt. Investors across the world are increasingly reluctant to buy European government securities, underlined by these numbers from a Reuter's report: "Globally, the bonds allocation to the euro zone fell to 26.9 percent from 27.4 percent. But this masked a much greater U.S. and UK retreat. U.S. investors moved to 17.6 percent from 19.1 percent and British counterparts sliced their exposure to just 8.9 percent from a previous 11.9 percent." *

Making more cash available to the European system is not going to make this debt any more attractive; cheap dollars will help banks temporarily square off their books, but a Eurozone in recession doesn't suggest that the struggling European governments will be able to service their debt without a massive readjustment.

Here, for example, is speculation about an upcoming Spanish bond auction: http://www.reuters.com/article/2011/12/01/spain-bonds-idUSL5E7MU6KV20111201

The Fed's move smacks of desperation, and I wonder how many hours of trading the buoyancy will hold out.
For India, it had the immediate effect of kicking New York crude above 100 dollars; when our commodity markets closed last night, crude oil December futures were above Rs. 5200 per barrel, the highest they've been this year; if the rupee remains depressed, our Finance Minister will have to go back to the Parliament, asking for a supplement to the supplementary budget to finance the losses of the Oil Marketing Companies. This, of course, will not be a great signal for Foreign Exchange markets, which will bid the rupee down further.. etc.

Meanwhile, with our GDP growth rate slipping to 6.9% (and I suspect we have a ways to climb down yet), the India growth story is acquiring a somewhat tatty look. I suspect a de-rating of our PE multiples is around the corner, as soon as the euphoria of the Fed steroid shot wears out.

* http://www.reuters.com/article/2011/11/30/us-fund-assets-idUSTRE7AT1CK20111130

Markets in the week to come

What will this week hold for Indian equities, after the new lows of last week?

News from Europe will have a major impact; as yet, these are still rumours, but it seems that the IMF is preparing a fund to bail out Italy, via the ECB. This would seem unfair if it didn't include Spain; in turn that should require funding for a total of 14 countries where bond yields have spiked. Till the rumours find a concrete expression in reality, one way or the other, expect some risk-positive behaviour, meaning higher prices for equities.

This would also mean higher prices for gold, as greater monetisation takes place in the Euro zone. If this leads to higher crude oil prices, the fate of the Indian rupee remains questionable, and it may not find much support.

From the U.S., strong retail sales on Friday, the beginning of the holiday shopping season, will also prompt higher equity prices, which would reinforce crude and gold.

In India, our Finance Minister's demand for more funding of government expenditure is going to put the cat among the pigeons, and pressure bond prices. While the Reserve Bank of India (RBI) has been playing along, by buying bonds from the market, it knows this will pump extra cash into the system, with the consequent impact on prices.

News from abroad, in other words, may help lift Indian equities, but the more important influences will be domestic. The best bet this week, in my view, will be gold.

Umesh Pandey was murdered by bad policy

A toll-booth attendant was murdered in Gurgaon, near Delhi, on the night of September 22nd.

The apparent murderer, Vijayveer Yadav was an unemployed youth from the village of Kho, near Manesar. According to the Times of India, "cops said Yadav flew into a rage when the victim - toll booth attendant Umesh Kant Pandey - asked for the original registration certificate (RC) of the Bolero (vehicle) for letting him pass without paying toll, as was the practice for local vehicles. Yadav had just a photocopy of his driving licence".

The list of those exempt from paying toll on such highways is quite substantial, and includes the usual suspects - Chief Ministers and Ministers, Governors and judges, government officials on duty; all those who are paid from our taxes. Strangely, Robert Vadra is not specified as being exempt, as he is in the case of security checks at our airports!

Looking at the list as I drive to Uttarakhand or Jaipur, I have often idly wondered whether government officials on such drives are ever off-duty. I was not, however, aware of the exemption for those living in neighbouring villages; perhaps this was some kind of "enlightened" gesture for the toll road operator to generate local support for the project.

Clearly, the move back-fired. OK, morbid pun. But exemptions are usually bad ideas. They lead to contention about who qualifies and who doesn't; create incentives to forge documents and misrepresent antecedents, and vitiate the creation of an environment where all are equal before the law.

Two particularly egregious examples of  'special treatment' come to mind - the reservations of college seats for students belonging to certain castes, which led to the Mandal riots, and some particularly gruesome protest deaths; and the subsidy for kerosene, which has led to widespread adulteration of diesel, and the murder of at least two individuals brave enough to investigate the fradulent practices that most of us accept.

"Special treatment" is a manifestation of weak administration, which seeks the path of least resistance and most votes. Short-term measures create trouble in the long run, of which the death of Umesh Pandey is an extreme and heart-rending manifestation.

Suing US banks is counter-productive

Two major developments in the US made me sit up over the weekend:

- the first was the terrible employment report for August, which showed that new job creation in the US is at a stand-still.

- the second is that the Fed is going to sue virtually every major US bank for selling mortgage and mortgage-related securities to the housing agencies Fannie Mae and Freddie Mac. These institutions are now custodians of the US Fed, by virtue of the massive infusion of capital that the Fed provided.

The first bit of news has obvious implications for the US economy: lower employment can set off a downward spiral of lower demand, and hence even lower employment. This cycle will adjust only when there enough of a recession in the US for producers to force prices down so as to become competitive in world markets, and begin increasingly producing for export. This will, however, tend to be accompanied by  lower domestic prices, too, which is counter to the US government's desire to prevent deflation, which could cause nasty consequences for the huge debt overhang. 

Aside from the conflict between the self-adjusting cycle of prices and demand on the one side, and the government's concerns regarding debt on the other, there is another problem, namely that economic uncertainty all over the globe is pushing many investors into the dollar, which is leading to dollar appreciation, rather than the other way around, preventing US economic adjustment through this route. We have seen this before - in 2008. It will reverse, sharply, and not without further turmoil on financial markets; only then will this price-demand adjustment take place to the benefit of the US economy. It is going to be a long, volatile journey.

The second bit of news has much deeper ramifications. By deciding to sue banks on behalf of the housing agencies, the Fed is essentially suggesting that Fannie Mae and Freddie Mac were innocent victims of conniving banks. This is the worst kind of political posturing. The fact is that these were government sponsored agencies supposed to specialise in housing finance; they were leaders in creating mortgages and pioneers in creating derivatives for mortgage re--finance. To now suggest they were exploited by the big bad wolves of Wall Street selling them instruments they could not independently assess is dissimulation of the worst kind.

The timing of the proposed legal action is uncanny - it comes at a time when the Fed is at a loss on monetary stimulus, and virtually everyone has given up on the jobs front. Oh, and the US presidential elections are barely a year away. When this administration came into power, it bailed out Wall Street, peddling the move as an instrumentality to rescue Main Street. The first rescue was spectacular; bank profits bounced back, as did multi-million dollar bonuses. This created political discomfort, which deepened when the second part of the rescue act failed to materialise. Obama's ratings are dropping, and something needs to be done. Step 1 - step away from the banks.

Suing the banks will achieve nothing except some optics; however, it will deepen the uncertainty regarding economic policy and regulation in the US. One economic commentator calls such uncertainty 'regime change'. It think this is rather an extreme term; however, it does convey the level of complexity large financial corporations have to deal with. Amping up this uncertainty is not good for investment and growth, and drives a wedge of distrust between government and business. Good though this may seem for popularity ratings, it can only be bad for what matters, which is jobs on the ground.

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Obama admin seeks to recover political capital from banks

Obama's biggest political mistake was to bail out the banks shortly afer he took over as US President. At the time, he was (ill-) advised that this would help the economy recover, that "bailing out Wall Street"  was critical for the recovery of Main Street. Three years down the line,
- Main Street has not recovered
- unemployment is high, and the labour participation rate dropping.
- the economy is stagnating.
Most importantly, 
- elections are around the corner.


Something, clearly, has to be done. It seems unlikely that Obama will be able to do anything substantive to push the economy over the 12 months he has left to demonstrate any progress. Time for some optics, then, to show he is not on the side of Wall Street. Hence the move to sue US Banks for the quality of mortgage-backed paper they sold to Fannie Mae and Freddie Mac, now essentially custodians of the US tax-payer.


Little matter that these two housing agencies were supposed to have been expert at evaluating mortgages; were set up expressly with the purpose of expanding the market for housing loans. Hardly babes in the woods! See the second para (below) extracted from the Financial Time's blog, ftalphaville.


Commencing this vendetta against the banks is ironic for an administration that put them in ICU when they could have been allowed to die. Worse, it creates an adversarial relationship between the government and the banks, and sets up the apprehension that other arbitrary moves could be around the corner. This will inject more instability into a financial system that is already tottering. This will end badly. Very badly


From ftalphaville:

"Since Fannie and Freddie are in government conservatorship and Royal Bank of Scotland, another target of the action, is majority-owned by the UK government, the lawsuits have produced the unusual situation of Washington suing London over crisis-era losses on $30.4bn of securities.

Banks reacted angrily to the move."

Passing the Bucks:

BofA said Fannie and Freddie “claimed to understand the risks inherent in investing in subprime securities” and yet were “now seeking to hold other market participants responsible for their losses”. Deutsche Bank said the institutions were “the epitome of a sophisticated investor” and the bank would “vigorously defend against the action”.

Missing Sonia.

Is it a coincidence that Sonia Gandhi is not in 10 Janpath when UPA II is facing its biggest crisis?

According to one set of rumors surrounding her absence, hardly. Public pressure to fight corruption is massive, and Manmohan Singh is making some attempt to reveal the most corrupt. There is even a likelihood of India finally signing some kind of deal with Switzerland to make public details of 'secret' accounts held there. The long run-up to any such opening gives ample time to even the most tardy of horses to bolt.

School 1 has it that Sonia is away to tidy up her accounts, and stay one step ahead of the law that her party is now in charge of enforcing.

http://cplash.com/post/Sonia-Gandhis-Surgery980.html

School 2 has it that she is a closet drinker. Years of abuse have damaged her liver beyond repair, and she is undergoing a liver transplant.

School 3 believes that she was discovered to have cervical cancer a year ago. She was trying a miracle cure, but it did't work; now, she has undergone radical surgery to try and stem the advance of the disease.

The 4th statement I heard is a minor riff on the 3rd, namely that she is suffering from pancreatic cancer.

Poor Sonia. First to be so unwell; then to attract all manner of speculation. The fault is largely hers, though - a person with so much political power is a public personage. I think she and her family should be more open and transparent about her health, as was the Prime Minister's establishment when he needed to be hospitalised for a failing heart.

Be that as it may, Sonia has now appointed a Council of Regents to supervise matters in her absence. Clearly, the council is not working. Whether it has ill-advised the Grand Vazir, or he has kept his own counsel, they have shown extremely poor political judgement in the Anna Affaire. As a result, he is dictating terms to the Government.

Developments show how impatient and frustrated we Indians are with the ways of our government. We have had it up to here with corruption. The government's responses that it takes time to legislate are warranted, but in the mood of the times are seen as wheedling. The mood of the times are very dangerous for democracy as we know it. And, quite frankly, I am scared - whether it is Anna, Arvind Kejriwal, or Prashant Bhushan,  these are extremely self-righteous people with fascist tendencies. If they are given power, they will direct a great deal of it against progress as I see it, but most importantly against the very concept that you and I should be free to make our own decisions.

Unfortunately, it is the smugness of MMS and UPA II that created the political room for Anna and his self-righteous brigade to seize center-stage. They do not have the political backing or power to hold it for long. Nevertheless, the center has yielded, shown how weak it is. Once the Lok Pal Bill fever dies down - in a fortnight or two - other opportunists will challenge the center. It will require a great deal of savvy for it to hold. Whether it is MMS, Rahul, or the Council of Regents, I do not see it being possessed of the ability to manage the crises that will follow. Tough times.

Why our politicians are such slimes - a grassroots perspective

Over the last 3 years, I have been dealing with a gent - let us call him Bharat - in Nainital district. As he calls himself  'political-type', I find his behaviour quite instructive about the nature of local 'leaders', and their dynamic with the environment in which they operate.

Bharat is about 40, and comes from a relatively privileged family in Haldwani, the premier trading and commercial city in Kumaon. He went to one of the better schools in the area, and speaks English with reasonable ease, though he is more comfortable in both Hindi, and the Kumaoni dialect. I ran into him when he let it be known that he had bought some land adjoining one of my homes in the Nainital hills, and there was likely to be some clash over title to specific parcels. We were put in touch with each other by a mountain neighbour of mine, who went to school with him, but shared little else. Our common friend asked me to speak to him, "just so you you know the kind of person who is buying land on our hillside".

Bharat is sharp, and a man in a hurry. Though he adopts many surface courtesies, he has little value for other human beings. He is never on time for an appointment at the court, even though I have often traveled overnight from Delhi to transact our business. He has several balls up in the air at any time - in this case, scores of land registration papers, which he has bought, or taken an option on, by way of paying a small advance. These are carried around in a plastic shopping bag, by his driver and factotum 'Mike'. Honest, that is what he is called. Hopefully, the appropriate one can be pulled out when needed in the court!

Having zoned in on the land on my hillside, Bharat got all the relevant details from the tehsil office. On one occasion when we sat down to iron out the remaining 'border disputes', Mike sauntered up from his office with the original cloth map of land holdings, which is the badge of office of the 'patwari', the lowest level revenue official. Once he had all the details, he put village brokers on the job of finding title holders in villages scattered across the mountains and the 'terai', the moist plains at the foot of the Kumaon. The lands in our area have not seen revenue consolidation for 3 generations now, and the ownership for a single piece of land could now be held by as many as 12 people. Signatures were extracted by payment of whatever worked - small sums, bottles of liquor, force, threats.

Piecing together various bits of information over the three years I have been dealing with Bharat, my sense is that he paid an average of Rs. 45,000 per 'naali' of land - where a naali is the local measure, approximately 200 square meters. The sale price he was able to command was in the region of Rs. 300,000. This amount of arbitrage is the surest sign of an inefficient market; in this system, the inefficiency stems from 3 factors:

-firstly, the lack of transparency of data. I have several times tried to obtain similar data from the patwari and tehsil: I have been told the data is not available, or they are not permitted to release it.

-secondly, consolidating land titles and holdings should be a routine revenue task; our British rulers carried it out regularly, but it is something our adminstration has shirked.

- thirdly, the fact that the joint-holders are so scattered, and difficult to contact. The latter is changing, as most families now have at least one cell-phone, and the former is due largely to the second set of factors.

The net result is that the system has created a milieu in which huge value accrues to a 'fixer'. I had seen the value to consolidating the land around me by the mid-90s, and was on-site, as it were. Having made some efforts, I discovered that the administrative costs were too high; in other words, the system is rewarding, not foresight, but the ability to extract information from holders of public office, and extort signatures to title.

In one moment of heart-to-heart conversation with my wife, Bharat had spoken to her of his ambition - "I am trying to make lots of money, fast, so I can fund my elections*". So that, I guess, he can make even more lots of money. Sounds like Mayawati. Bharat often tried to get into conversation with my wife - he is part of the lower echelons of the Congress Party, and knows that her aunt is the Governor of his state of Uttarakhand, and a long-standing senior functionary of the Congress.

Once, he called me to ask whether I could take up with the said aunt a 'file' concering a friend's relative who was a government servant, currently employed in Andhra Pradesh, seeking a transfer to Uttarakhand. I said I had never asked my aunt-in-law for favours, and never intended to. "I understand", he said, "lekin hammey to yeh sab karna padta hai - ham political type ke hain, na."

This is the construction of 'political work' at the grassroots - someone who can game a contorted, opaque system, and trade favours. As long as this is the reality of our governance, only the Bharats who are best at this game will rise to become Councillors, MLAs, and MPs. If they are truly masterly at the game, they will become Kalmadis. And it will require talent of the most vaultingly ambitious kind to become a Mayawati, or a Sharad Pawar.

Anna Hazare and Kejriwal burning some paper in Delhi will do little to transform this reality. 

* In this behaviour, Bharat is conforming to type. In a paper in The World Financial Review, Bibek and Laveesh write:
The 5th Report of the Administrative Reforms Commission quotes from the Vohra Committee Report and we end on that sobering and unsatisfactory note. “An organized crime Syndicate/Mafia generally commences its activities by indulging in petty crime at the local level, mostly relating to illicit distillation/gambling/prostitution in the larger towns. In port towns, their activities involve smuggling and sale of imported goods and progressively graduate to narcotics and drug trafficking. In the bigger cities, the main source of income relates to real estate – forcibly occupying lands/buildings, procuring such properties at cheap rates by forcing out the existing occupants/tenants etc. Over time, the money power thus acquired is used for building up contacts with bureaucrats and politicians and expansion of activities with impunity. The money power is used to develop a network of muscle-power which is also used by the politicians during elections.”⁹ There are no easy answers to this problem.

The American fiscal crisis and isolationism

http://www.project-syndicate.org/commentary/hill8/English

In which the author speaks of American isolationism against the backdrop of the fiscal crisis.

This was inevitable; the sharp heat of 9/11 brought this to my mind - for many ordinary Americans, the attacks on the twin towers were a punishment by foreigners for the unwanted presence of American troops on their soil.

And now that the fiscal crisis is - in effect choosing American presence in Afghanistan over schools in their backyard - this is not going to swim.

In places like rural El Paso County, on the eastern plains of Colorado, far from the federal budget debate’s epicenter, spending cuts are the order of the day. School districts are increasing class sizes as they shed teachers, as well as deferring maintenance projects and curtailing the school-bus service. These cuts are having a very real and immediate impact on El Paso County’s residents. Can they, and other Americans who are losing vital services, really be expected to rise above it all and support funding to build new schools in Afghanistan?

Cheap food no one wants

On July 11, the Economc Times carried a graphic feature showing that India is buying more of high-value food.


The share of cereals in verall spending is down from 18% to 15.6% in rural India, whereas that for pulses is up from 3.1 to 3.7; for milk from 8.5 to 8.6; and for eggs, meat and fish from 3.3 to 3.5.

Meanwhile, the NAC has been barking up the tree of pulses, and pressuring the broke exchequer to up the allocation of cereals to the poor, and the non-poor. This only echoes the fixation of our entire food and agriculture system with grains  for several decades, as a result of which we have a glut of grain, the depots are choked, and we are considering exports.

Centralised planning is always behind the curve.

The World of Make Believe

When the debt crisis hit the US in 2008, the Mark-to-market rule for valuing balance sheets was suspended. If it had continued to be enforced, bank balance sheets would have been extremely vulnerable, despite billions of dollars of funding from the US government. As a result, the derivatives that helped ignite the crisis are still sitting in bank books, and valued as the banks would like them to be.


It seems as if the banks are waiting for asset inflation to take place, so that some one can announce, "Game Over", and every one can move into reality mode. Which is why the Fed is trying so hard to ignite inflation with its zero-interest-rate-policy, ZIRP.

Some commentators believe that recent commodity price inflation has been a result of cheap money; many believe that only supply-demand imbalances can sustain price increases. I would tend to side with the latter, while noting that cheap money penalises savers, incentivises consumption at the cost of saving and hence investment, and hence leads to higher commodity prices through the obvious demand route.

Be that as it may, when crude oil prices seemed to threaten the recovery all over again, this June, the IEA coordinated a release of 60 mn barrels from various emergency stashes. The impact on prices was sharp, but it didn't sustain very long. Interestingly, the buyers were not largely speculators or hedge funds, with the exception of a small punt by Barclays; the bulk were oil companies, suggesting that those on the ground (or below it!) are finding supply lines squeezed.

From a gaming point of view, IEA is in danger of having mis-fired - if the release of stocks was intended - even partly - to show OPEC it had some firepower, the threat may have proved to ineffective.

 The most recent egregious example of governments trying to game markets comes from the ECB. Dealing with the Greek crisis, European bankers got hit with a severe Moody's downgrade of Portuguese sovereign debt. However, since Portugal will inevitably require further funding, and commercial loans are not viable, the ECB will have to extend funds to Portugal. With the downgrade, collateral requirements will go up.

Or would, if the ECB had not decided to suspend normal rules for evaluating collateral. This suspension of reality led to the following from Bernd Volk, of Deutsche Bank:

"Given severe rating consequences for Portuguese covered bonds resulting from the downgrade of the sovereign bonds by four notches to Ba2 and also other peripheral covered bonds facing subinvestment grade risk (e.g. Greek covered bonds by Fitch in case of Greek sovereign debt rollover), we suggest a significant “Rating deleveraging” of the financial system, i.e. less use of rating requirements in laws, regulatory requirements, bond prospectuses and other contractual agreements. Instead so-called “indeterminate legal terms” (“unbestimmte Rechtsbegriffe”), to be determined by the respective institution of market participant, could be used."

Tongue firmly in cheek, no doubt.

Birthday thoughts

Here's Seth:

When did you get old?

At some point, most brands, organizations, countries and yes, people, start talking about themselves like they're old.

"We can't stretch in that direction," or "Not bad for a 60 year old!" or "I'm just not going to be able to learn this new technology." Even countries make decisions like this, often by default. Governments decide it's just too late to change.

The incredible truth is this: it never happens at the same time for everyone. It's not biologically ordained. It's a choice. It's possible to put out a hit record at 40, run a marathon at 60 and have your 80 year old non-profit change its business model. It's not as easy as it used to be, but that's why it's worth doing.

TRUE!

The other thing I read recently was, as you get older, you tend to spend more time thinking about the past. This is a clear trap - not only is it a waste of time, but it can also lead to regrets, and guilt, baggage we can do without. Something in my nature/nurture means I don't go here, which is wonderful.

Sharp accounting by DLF

This piece* in the Economic Times signals severe cash - and reporting - pressure at DLF, India's largest real estate company.

Essentially, it suggests that over 75% of the reported sales by DLF during 2010-11 never took place! That is a truly amazing statistic (my own number work suggests a lower figure, but still very substantial). Sales reporting was done on the basis of 'percentage completion'. This is like Soviet accounting - production is equal to turnover - irrespective of whether the stocks rusted in a corner of the stock yard, and with a total disregard to eventual price realisation.

I asked a CA friend about the accounting practices involved, and he tended to believe that ET had got it wrong. But looking at the skeletal balance sheet on the DLF site, it would seem that there have been some very 'interesting' changes on the company's balance sheet between March 31st 2010 and March 31st 2011:

1. 'Stocks' have gone from Rs. 12481 cr. to Rs. 15039 cr., an increase of roughly Rs. 2500 cr.

2. 'Other current assets' - a convenient grab-bag, have gone from Rs. 4684 cr. to Rs. 7890 cr., an increase of over Rs. 3000 cr. A look at DLF's annual report for 2010 shows that the ET has it right - this includes 'unbilled receivables' - note below.**

For a business with sales recorded at Rs. 9000 crores, over Rs. 3000 crores has appeared by way of unbilled revenues. This is a whopping amount; if the unbilled receivables are not converted into cash soon, DLF is going to have a whopping cash management problem on its hands. 

Meanwhile, between year-end 2010 and year-end 2011, Rs. 5500 crores worth of investments have dwindled to under 1000 cr., a diminution of Rs. 4500 crores in financial assets, while loan funds have gone up by over Rs. 2000 crores.

This all looks like deep distress.



*Real estate: Experts doubt 'percentage completion' method of revenue calculation by builders - The Economic Times

** Here is the relevant revenue recognition policy from the 2010 annual report:
" Unbilled receivables disclosed under Schedule 11 - “Other Current Assets” represents revenue recognised based on Percentage of completion method (as per para no. 7a and 7b above), over and above the amount due as per the payment plans agreed with the customers."




 

Sovereign credit

The argument is not whether Greek will default or not, but how to handle the inevitable default. Do they outright stop paying on their bonds? Or "roll them over" for later payment? Or call in the bonds and issue new ones with longer maturities? Germans are insisting that at least a third of the bailout fall on private creditors. Anyway you cut it, (1) it ain't been settled yet and Greece will run out of money in 8 weeks, and (2) Greece will default.Right, Greek government is in debt up to its ears, more than $42,888 per person, not solvent like the US with a government debt of $44,900 per capita.Now y'all explain to me, because I want to know, how the US is in better shape. I'm waiting

MA

At 22, my mother was a Romantic. A lover of literature, and a closet poet, she dreamed of turreted castles and a white knight who would carry her away. Since they lived in a different time and place, she spirited herself away to Allahabad University, to lose herself in books, and write a Ph.d. 

One day, her guardian, the venerable RN Banerjee, ICS, asked her “Child, have you considered marriage?”

“No, Uncle Banerjee.”

“Are you averse to it?

“No, Uncle Banerjee.”

That was enough: a knight, not on a white horse, but in white and tan shoes, was produced, the Romantic agreed to marry him, and one of the 3 critical pieces of evidence stands in front of you.

During the short period of their engagement, Ma told me, she decided her life was to have one goal, to have a happy family. Our childhood was truly glorious; we were bathed in love, cushioned in security, and Ma seemed to have inexhaustible energy – she ferried us to and from school, and swimming and singing, to birthday parties and film shows: and every meal – at least four of them a day, was a delight.

When my younger sister was about 10, Ma’s father-in-law, a man known for his simplicity and conviction, told her – now that the children don’t need you so much, it is time for you to give back to the world from which you have received so much. Ma turned on a dime – beginning with the Delhi Red Cross, in 1967, Ma began a life of social service.

If her father-in-law oriented my mother in this direction, her life’s work was inspired by her own mother – a widow before she was 40, my gentle Nani could never fully accept the fact that she became part of our home – her daughter’s home -in her last years. Ma decided that she would set up a home for elders, one where they could spend the twilight of their lives in dignity. And so was born GODHULI.

It took the better part of a decade to create this facility. The biggest stumbling block – as in any thing in our country – was the government. Despite adhering to every rule in the book, the completion certificate would not be granted without servicing DDA in customary fashion. Ma made clear, simple choices. She would not pay. At 75, she made 52 trips to the DDA to get her files cleared, every one recorded in her diary. It was only when she petitioned the Lieutenant Governor’s office that the files were cleared, and Godhuli came into being.

The last 2 years of Ma’s life were an object lesson in dignity and the importance of choices – when chronic diabetes turned to kidney failure, the doctors prescribed dialysis. Ma spent last summer in her beloved mountain cottage, giving thought to the matter. By the time we returned to Delhi, she had made her decision – I have lived a full life, done what I wanted. I am not going to spend my last years dependent on a machine.

So simply stated, there was nothing to contest. The decline was gradual, but despite a crippling fall last December, Ma limped back to work, supporting the wonderful younger women who have taken on her beloved ‘balwadis’, and chairing meetings at Godhuli. Her last meetings were on a Thursday; by Friday, she became breathless, and by Monday, she slipped into unconsciousness.

“I want to die in my own home” she said. As always, Ma made her choices clear, and our lives simple. Her maids were devoted to her, and her daughters were angels of concern, love and tenderness.

She passed so, so gently into her future – one in which, I am sure, her choices will be even more crystal-like, her concern with giving and living even more vibrant.

Thank you for being here for her, and for us. Go home, not with sorrow, but with peace and a sense of belonging.

Om Shanti, Shanti Om.

Fear and Swimming

Did my 20 laps well before the Sunday madness began at our local pool. Only one child yet, a sturdy looking 7 year-old, repeatedly mimicking dives from the poolside, but still landing feet-first. Struggling to swim the 10 feet to the ladder, often clutching the wall for moral support.

The coach, a slim 22-year old, shouted encouragement while slouched in a plastic chair. The mother, who couldn't be more than 25, was off in the far corner, earnestly talking on the cell phone.

I tested out my butterfly stroke, as fast as I can do at this age, then stroked back to the boy. He jumped in again, struggled with his own fear, and made it to the ladder. "You are swimming so well", I told him, and asked him his name. Pulkit was stuck in a strange place, between his own desire to swim and his fear. "Jump again, and swim to me."

First he gasped, then he grasped, his arms rigid with the tension of his own fear. "Hold my hands, and kick." His eyes were masked by yellow-tinted swimming goggles, but his neck and head were taut with tension, as I kicked backwards to the shallow end of the pool. His mother sort of smiled, but didn't move as we approached her. "Wow! Look how much you've swum," I told him. He couldn't raise a smile, but his arms were less tense.

"Want to swim back?" He nodded. I kicked off, and noticed that the coach was slouching a bit less. After I had parked him at the end of the pool, I struck off for another fast lap, but when I returned, Pulkit was clearly waiting for me. I led him to his Mum's end again. This time she was pacing up and down, earnestly talking in to her phone. "When you kick, try not to bend your knees". I turned to the wall to show Pulkit how he kicked. He wanted to mimic me immediately. "No, no - that's not how you should kick. This is how you should kick - legs extended".

Earnestly, he turned to the wall, and tried to mimic me. So far he had not uttered a word, nor smiled once. I led him back to the coach's end. "Now swim across the pool." Pulit froze. "OK, Swim up to me", and I positioned myself 10 feet from him. He gasped, wiggled his legs and feet, and made it to me. "Now to the end" - another 15 feet across the breadth of the pool. Within 5 feet, he was turning to the wall. "No, no! Come to me" I said forcefully. He corrected himself and dog-paddled to the far wall - 25 feet in two passes.

"Now, if I stay within reach, will you swim back to the opposite ladder?" I asked him. "What if I drown?" - his first words since he had told me his name. "Do you think I will let you?" No answer, but his body seemed primed for action: "Ready, Steady, GO!" I urged, and he kicked off. Every couple of seconds, his body would go rigid with tension, he would grasp for me, just inches out of reach. "Breathe", "Kick", "I'm here", "We're almost there". And we reached.

The coach sat up. "Thank you sir" At the far end, Mum was still talking into her cell-phone. "You didn't drown, hunh?" Pulkit clung to the ladder and regarded me impassively. "Are you tense?", I asked him. "No", he answered, but my palm on his little chest felt his heart thumping away like a scared rabbit's. "Tired, or you want to do another?"

"Another".

By the time I got out of the pool, Pulkit had crossed its breadth 6 times, the coach was slouching in his chair, and his Mum was still on the phone.

When I had changed and was heading to my cycle, I saw Pulkit playing with his kick-board in the shallow-end of the pool, and caught his mother smiling at him while listening to the other end of her call. The young coach was still slouching in his plastic chair. But he did say "Thank you sir!" again. Polite boy. Bad coach.

Cash in Indian real estate

Cash, 'black' money, No. 2, or 'kacchha paisa', has always paid a huge role in Indian real estate. Few deals, except in the new condiminiums, take place without a substantial payment of money that goes unrecorded, both in bank accounts, as well as in the registration fees that are calculated as percentage of the consideration amount declared.

When a seller insists that he be paid entirely with bankable funds, the number of potential counterparts is typically very small, and the consideration usually lower than the going market price. 

Over the last few months, I have been getting the sense from several people that the percentage of cash in Delhi property deal has been going up: in Punjabi Bagh, a property worth 25 cr. is officially transacted at Rs. 4 to 5 cr.; at the southern end of the Chattarpur area, in Mandi village, 2 1/2 acres of farmland are worth Rs. 14 cr. Only 3-4 cr. are being paid by cheque.

If indeed the proportions have changed, then it is worth trying to understand what has happened. My initial conjecture is that only hot money is chasing property now, money looking for a place to park itself. Legit money is drying up, as interest rates rise, and property prices have reached unaffordable levels.

If this conjecture is right, the property market should correct substantially, as the ratios become absurd. The seller who is not looking to invest the money in another property does not know what to do with huge suitcases full of cash, or indeed where to safely park it.

US Sub-prime crisis was public policy gone badly wrong

From the Financial Times' ftalphaville blog of this morning:

Michael Cembalest has made a retraction. JPMorgan’s private banking chief investment officer has a new view on the roots of the US subprime debacle.
From a note sent last week:

Retractions: US earnings growth, the Euro, and the primary catalyst for the US housing crisis

Agencies played a larger role in the housing crisis than we first reported. In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector. Why? US Agencies appeared to be responsible for only 20% of all subprime, Alt A and other mortgage exotica. However, over the last 2 years, analysts have dissected the housing crisis in greater detail. What emerges from new research is something quite different: government agencies now look to have guaranteed, originated or underwritten 60% of all “non-traditional” mortgages, which totaled $4.6 trillion in June 2008. What’s more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make much riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards. To be sure, private sector banks and investors are responsible for taking the bait, and made terrible mistakes. Overall, what emerges is an object lesson in well-meaning public policy gone spectacularly wrong.

For [Edward] Pinto and [Peter] Wallison [authors of two recent reports on the subprime crisis] this quote from the Department of Housing and Urban Development in 2000 is a smoking gun of sorts, and lays out a blueprint for the housing crisis:
‘Because the GSEs have a funding advantage over other market participants, they have the ability to under price their competitors and increase their market share. This advantage, as has been the case in the prime market, could allow the GSEs to eventually play a significant role in the subprime market. As the GSEs become more comfortable with subprime lending, the line between what today is considered a subprime loan versus a prime loan will likely deteriorate, making expansion by the GSEs look more like an increase in the prime market. Since, as explained earlier in this chapter, one could define a prime loan as one that the GSEs will purchase, the difference between the prime and subprime markets will become less clear. This melding of markets could occur even if many of the underlying characteristics of subprime borrowers and the market’s (i.e., non-GSE participants) evaluation of the risks posed by these borrowers remain unchanged.’ (HUD Affordable Lending goals for Freddie Mac/Fannie Mae, Oct 2000).
The strategy worked, as shown in the chart: the Agencies took the lead in the 1990s and early 2000’s in both subprime and high [loan-to-value] (>=95%) loans, acquiring over $700 billion in non-traditional mortgages before private markets had even reached $100 billion. Then in 2002-2003, private sector banks took the bait and jumped in with both feet. According to Wallison, the distortion of the housing bubble from 1997 onward obscured what would otherwise have been rising delinquencies and losses. As a result, when investors, banks and rating agencies finally got involved in a substantial way, they ended up looking at understated default statistics on subprime, Alt A and high LTV borrowers.

… The Wallison/Pinto research appears to be a well-reasoned addition to the body of work dissecting the worst housing crisis in the post-war era. It is convincing enough to retract what we wrote in 2009. As regulators and politicians consider actions designed to stabilize the financial system and the housing/mortgage markets, reflection on the role that policy played in the collapse would seem like a critical part of the process.

Links to Pinto and Wallison’s reports are here and here.
If you’re wondering why it took Cembalest and Co so long to figure this out after the housing collapse, the JPMorgan analyst blames nothing less than “creative reporting” that masked the agencies’ real subprime lending. Fannie Mae classified a mortgage as subprime only if the loan was originated by a lender specialising in subprime, or by the subprime units of the big banks. They didn’t use things like credit, or Fico, scores to report all subprime exposure, thus reducing its reported subprime loan count.
And if you’re thinking private sector banks and brokers still made much worse loans than the government agencies on a dollar-per-dollar basis, well, Cembalest has a response for you too:

… Wallison and Pinto are not trying to find out who made the worst loans. They’re trying to figure out why underwriting standards collapsed across the board; how policy objectives were designed to have private sector banks follow the Agencies off the cliff; and why Agency losses to taxpayers are estimated to be so large ($250-$350 billion). It’s a hollow victory for Agency supporters to claim that their version of Alt A and Subprime was not as bad as private sector ones: the Agencies had almost no capital to absorb losses in the first place, given what their mandate was. According to the Financial Crisis Inquiry Commission, “by the end of 2007, Fannie Mae and Freddie Mac combined leverage ratios, including loans they owned and guaranteed, stood at 75 to 1.” After factoring out tax-loss carry-forwards, Agency capital ratios were probably below 1% on over $5 trillion of aggressively underwritten exposure.

Ouch!

Manmohan working on his epitaph

On February 12th, I wrote, of our PM,

"If he is to hang up his boots with any sense of achievement, visibly combating corruption could be his chance to go down in history."

 And, that,

" If my speculations are correct, then Manmohan Singh  has sent word out that the fight is joined. 10 Janpath has been warned. There is little Sonia can do but back him. She has no power to restrain him; the worst she can do is sack him. Since he has no political dynasty to perpetuate, and no skeletons in his cupboard, she has no hold over him. However, his departure at this time would threaten the stability of her government."

 

Since then, the Anna Hazare gang has tried to create measures to become super-cop and super-judge. Between the rifts in so-called civil society and the inevitable assertion of the establishment, the powers of the Lokpal will not be quite as far-reaching as this petty autocrat wants. 

 

Meanwhile, I continue to get he sense that Manmohan is coming down harder and harder on corruption. 

 

1.Sanjay Chandra, the CEO of Unitech, is in jail, in connection with the 2G scam. And, even while their boss is out, 3 of Anil Ambani's senior executives are behind bars. If the case against Reliance Telecom has merit, he will join them; if not, they will be sprung.

2. The favour Mukesh Ambani has received from one dispensation after another is being withdrawn. The Directorate General of Hydrocarbon (DGH) is openly censuring his company's operations in the KG Basin, and talking of levying fines on him. Barely 2 years ago, when our Comptroller and Auditor General compiled findings to the effect that RIL's expenses in the KG basin were 'gold-plated', the report was put aside. Today, the DGH is openly talking of not structuring RIL's return to compensate for these questionable investments. And, to make their intent clear, they have asked RIL to dig 10 more wells. Oh, and when RIL declared two petroleum finds in a PR exercise to reduce atention to their below-par quarterly numbers, the DGH was incredibly fast off the blocks in declaring that these finds were not commercially viable.

Clearly, the knives are out against Mukesh Ambani. I have been getting a sense of this estrangement between 10, Janpath and Sonia for over a year now. I have been speaking about this to others in the investment business' one well-connected investor said this was not a tenable surmise, as 10 Janpath is heavily invested in RIL. But. to his credit, he sniffed around and got back, saying that something had changed.

3. This morning's front-page story in the Delhi edition of the TOI spells out the steps that the department of Revenue Intelligence is taking against those who keep money in tax havens abroad. Direction came from the Supreme Court, but the depth and width of work that has been done speaks of major support from the executive:

 

- 18 lakh trips to destinations known as tax havens have been identified.

- 2 'individuals' who have made 60 trips each during the last year have been identified. That is an amazing amount of sifting.

And, this paragraph: "Among the legitimate travellers, officials don't rule out presence of corrupt bureaucrats and politicians who have someone else footing their credit card and hotel bills during their stay abroad. All such cases are being identified".

There are more than stirrings afoot. The pot has been poured into a mixer, and the speed will be turned up.

I hope.

Why Bernanke is unconcerned about inflation

 India is wrestling with inflation, and much of this is attributed to the flood of global liquidity, wrought by a US Fed, which is determined to create asset price inflation in the home country. This determination is rooted in:
- the surge in bank 'assets' in 2003-07
- the rapid depreciation in the value of these assets in the 2008 meltdown
- Fed support for these assets through unprecedented bail-outs for the sector

Now the US banking system desperately needs clarity on the value of these assets, which are currently marked-to-model (convenience) rather than the more rigorous mark-to-market that can be the only prudential norm.

The question, then is whether the US, too should not be concerned about inflation feeding through to the economy, especially when so many are unemployed. The literature is full of studies that show this will not happen.

I am not convinced:

http://www.bostonfed.org/economic/ppb/2011/ppb111.htm

The barbarous relic may have some use - yet

Indians own an estimated 18,000 tons of gold, the World Gold Council estimated in October 2010. On the last trading day in April 2011, gold traded at a little over 50,000 dollars a kg, or 50 mn USD per ton. Rounding the numbers off for simplicity, that's roughly 1 trillion dollars of gold.

A lot - that's roughly 3 times our FX reserves, which actually only just balance our FX borrowings.

I have had this thought for a while that, if the global financial imbalances lead to further currency volatility, one of the fall-outs will be much higher gold prices. A nation as dependent on commodity - particularly petroleum - imports as ours will be badly hit if raw material prices continue to surge. If the crisis gets really deep, I have this gut feel that our private holdings of gold will have to be mobilised to bail us out.

Our government is grossly under-prepared.

Low interest rates distort the economy

Rajiv Kumar, who heads an industry association, and Surjit Bhalla ("What inflation?") joined their pens this weekend to Deepak Parekh's plea for a dovish stance on monetary policy in response to surging prices. 

I will not join with them on theoretical discussions about flaws in our price collection mechanisms, except to say that past experience doesn't suggest that official data systematically pegs price rises too high. And I will agree with them that higher interest rates run the risk of slowing down investment in our economy.

However, I do not agree that concern about the latter should trap our policy makers in getting into a cycle of higher prices, higher government spends, higher deficits, and higher inflation expectations. In its role as the nation's biggest borrower, the government could easily settle into a cosy relationship with higher prices, leading to higher nominal tax collection, combined with negative real interest rates. This reduces the cost of being fiscally indisciplined.

From the viewpoint of the real economy, though, it increases the chance of a greater misallocation of funds - going into expenditure that does not increase productivity, but drives up demand, a la NREGA; or encouraging consumption of scarce resources being distributed at prices below cost, such as food, petroleum products and fertiliser.

When all nominal prices are rising, a sensible economist should be looking at how relative price movements drive the misallocation of resources. In India, ca. 2011, low real interest rates have encouraged a 7-year boom in up-market homes in our largest urban agglomerations. Today, they have stacked up to unsold stocks worth several years of sales at peak volumes. Similarly, cheap finance and cheaper diesel have encouraged a boom in sales of diesel cars.

These are gross misallocations of resources into a still poor nation. If our economic leaders will not discipline themselves, it is the role of our columnists and free-standing economists to do so. But the two I mentioned are respectively playing their lobbying role and talking their book.

Pity.

HDFC's interest in low interest rates

Mumbai home sales dropped to a 2-year low last quarter, according to real estate analyst Liases Foras, and logged 14% lower than the previous quarter, even while unsold units reached 105 mn. square feet.

In India's largest market, Delhi and surrounding areas, sales soared in contrast, by a whopping 32%; nevertheless, unsold units soared to 194 mn. square feet, roughly 2 years worth of sales at the current elevated levels.

This dynamic could turn explosive if the Reserve Bank of India (RBI) decides to actually pay people money to lend money to banks, rather than pay banks to borrow money from the RBI - which is what is happening today, when the RBI repo rate is considerably below inflation. The volume of economists - including the IMF - pressing the RBI to get tough on inflation is ratcheting up, even while the Chairman of HDFC, our largest housing lender, says that 25 bps (0.25%) is hike enough. Of course he would - who would like to see the cost of his major (only) raw material go up!.

This view, in an interview printed in the Mint this morning, is a lot better than another pious statement he made a couple of days ago, that the RBI is never behind the curve. That sounds a bit like his fellow Mumbaikars believing that Ganesh statues were drinking milk a few years ago. Actually worse, because in that case, it did appear that the milk was disappearing into the stone of statues. In this case, it would be pretty obvious to anyone who bought their own milk and vegetables that inflation is way ahead of the RBI's gentle incline. I guess Deepak Parekh doesn't.

Buy his own milk and fruit, I mean.

Dhoni holds down Gillette run-rate

I know, I know, Team Gillette doesn't play cricket. They try to sell blades. Their competition is not so much other blade brands as not shaving. Unfortunately, everytime the TV cameras zoom in on Dhoni or Sehwag, they show a grizzly, unshaven face. It's almost as though it's not manly to go about with a clean-shaven face. When the stars of the other Indian galaxy pose at their premieres, they're unshaven too - Abishek Bacchhan and Hrithik Roshan. The only prince of our political world, Rahul Gandhi, is most often seen with a two-day stubble.


Gillette has tried to fight 'Not Shaving' with a campaign saying women prefer men who shave regularly. Its a hard slog when their competition is the pantheon of young Indian gods. In the last quarter, Gillette spent Rs. 73 cr. on advertising, a staggering 28% of revenue for the quarter. In my book, anything over a 10% spend on advertising is already aggressive. I have nothing against aggressive, especially when the parent company has deep pockets, and a virtual monopoly in many markets. The cautionary sign, though, is that sales growth is not electric - at 20%, it does stand apart from growth at Nestle, for example. And yet, the Price-Earnings multiple for Gillette now stands at over 60. Much too pricey, by my reckoning.

What's with wheat?

Two days ago, the Election Commission cleared the announcement of a wheat procurement bonus of Rs. 50 per quintal (0.50 per kg.), a few days after the wheat procurement season began. The announcement was thus delayed by a few days, but the real question is, why announce a bonus at this time at all?

The normal logic of a bonus is that it gives an incentive to the farmer to produce more wheat, by planting more. For this to operate, the bonus should be announced before the farmer takes his planting decision. For Indian wheat, that would be in November.

This throws up 3 possibilities for any rationale for the bonus:

1. That the government is afraid that procurement may be low, despite an excellent harvest; this, in turn, would mean the farmer prefers to hold the wheat for sale in the market when prices rise later in the year. Nothing in the market suggest that the holding patterns of Indian farmers are changing.

2. That it is purely a political decision - if prices, including agricultural prices, are rising across the board, then farmers should share in higher realisations.

3. That the government wants to capitalise on high international wheat prices, and export some wheat later in the year. This could create some political discomfort if the farmers do not share in the higher realisation.

I suspect that 3. is the major calculus, as the US harvest appears to be threatened by late winter rains, and Kansas wheat futures, at over 9 dollars a bushel, are extremely high. This translates to over Rs. 15 per kg, compared to the ruling price of under Rs. 12 in India, and should create lots of selling opportunities in Europe and the Middle East.

CBI - Congress Bank of Intel

The CBI* is like a bank of secrets, with vaults upon vaults of dirt on everybody of importance or even with a remote chance of becoming important one day.

It is also a private bank, probably the most private one in the world, and at any given point in time, not more than 2 or 3 people can order wealth from its vaults. Today, those privileged would be Mrs. Gandhi, Mr. Chidambaram, and possibly Dr. Manmohan Singh and Pranab Mukherjee.

The extent of its vaults can be gauged by the fact that, days after Anna Hazare's movement began to threaten the cozy criminality of our political rulers, the Congress Bank of Intel was able to unearth the fact that some decades ago, one of the NGOs of which he was part had not filed its annual returns. This is becoming part of the smear campaign against Anna Hazare.

Frankly, he should have expected it. Most politicians got where they have because they are pepared to fight hard, and dirty. If you are going to confront them, you had better be prepared for the fact that they have greater resources than you, by several orders of magnitude. And if you are trying to ride the high horse of morality, then you had better be prepared to get tried by the much more explicit code of legality.

* Central Bureau of Investigation

Bribes should be legal

Kaushik Basu, Chief Economic Advisor to the Ministry of Finance, calls it right when he says that one category of bribes ordinary Indian citizens pay is in response to pure harrassment. The bribe is not corruption on part of the citizen, as he is receiving no favour in return for the payment - it is the gatekeeper's fee. But the gatekeeper is already being paid by the Indian state, whose servant he supposedly is.

This paper breaks the moral equivalence we keep hearing, which says that we are all culpable, equally to blame, for paying bribes. Kaushik Basu recognises the fact that there is a horrible asymmetry betwen the citizen and the gatekeeper, and suggests that the legal treatment of it should correspondingly be asymmetrical.

Thus, the paying of the bribe should be legal, but the receiving of it illegal. This creates an incentive for the person paying the bribe to 'out' the official receiving it. If the Indian government had the cojones to adopt the Kaushik Basu route, we would have an open road to reduce corruption, one that actually empowers people - other than the self-selected Anna Hazare gang.

I don't know whether such a process has been tried in other nations; it doesn't matter whether it is original or not, but it seems extremely workable to me, and cuts to the heart of the matter. Good going Kaushik. His paper, here:

http://finmin.nic.in/WorkingPaper/Act_Giving_Bribe_Legal.pdf

My Bill to actually reduce corruption

My friend Amit Varma hit the button when he wrote on Yahoo! India last week that corruption is a manifestation of too much power vested in our politicians. Now Anna Hazare and his mob want power over the corrupt mob, by virtue of their self-proclaimed virtue.


I have no reason to doubt their squeaky cleanliness, or even their good intentions. But then, I didn’t doubt those very attributes of the good doctor, Manmohan Singh. And we all know how that played out. Now, the custodians of our nation and the custodians of our virtue are sitting down to draft a bill that will make us a less corrupt nation. Hah!

Meanwhile – and I love my food too much to fast for the right to shove this into parliament - here are the first three points on my bill to free our nation from the arbitrary powers of governance:


1. The premise that natural resources are the property of the state is like motherhood, or virtue – it seems impossible to attack. But, this convenient iteration by our rulers allows them to wield enormous powers over the allocation of these resources, powers that lie at the heart of two of the most contentious economic battles in our nation – telecom spectrum, and petroleum product pricing. This formulation allows our courts to take sides with one brother against another, and give preferential rights to public sector undertakings, which latter only extends the fiefdoms of our czars.

Remember that, unlike resources, the ‘nation state’ is an artificial construct; the entrepreneur, on the other hand, is a real person, who puts time, energy and material resources into tapping natural resources and channeling them into productive use. Giving the first supremacy over the second is a yogic headstand that causes you to see the world upside down, and has created corruption on a mind-boggling scale. In other nations, similar thinking has created some of the most repressive societies on earth – think Saudi Arabia. Instead, we need guidelines that encourage initiative, exploration, exploitation and economic activity, while allowing tax laws to channel some of the value-added into the essential affairs of the state.


2. Land rights must be secure, clearly documented and unalienable, except by the explicit consent of the owner. Some of the most visible recent agitation in India has been a result of the nation state severely curtailing the individual’s right to his property. This has been convenient for rulers who manage to find virtue in both forcing some people to part with their land, and in preventing others from doing so!

In the former category, think land expropriated for industrial development, and sold on at ten times the price, or for building infrastructure, including toll-roads and malls. In the latter, think green virtue, which wants to save forests by refusing to grant tribal land-owners the right to sell their meager lands. Or paternalism, which in some states says that Scheduled Caste farmers would get exploited if they were free to sell their land to all comers; to do so, they need to seek permission from district authorities – who, being virtuous souls, wouldn’t dream of exploiting them.

And, while we’re on the subject of land, let’s find a way to wrest from state control the vast tracts of land that passed to it from the British Crown, and find fair ways to release it into productive economic use.

3. Members of Parliament and Legislative Assemblies need to be seen in the role conceived for them by our constitution - as rule-makers. Not as rule-breakers – a jibe I can’t resist; but more importantly, not as dispensers of favour and fortune. Instead, the Local Area Development Schemes gives each of our MPs and MLAs a fund to practice on a smaller scale the loot of public resources their cabinet seniors conduct. Though minuscule in monetary terms, such schemes set up a patron-supplicant relationship between the elected representative and his constituency; among local businessmen, they allow the law-maker to choose favourites. Such relationships are unhealthy, undemocratic, and most importantly, reinforce the sense that the role of politicians is to hand out favours and cash, rather than to frame sensible laws, and supervise their enforcement.

The Lok Pal charade is about politics, about the sharing of power between the elected, and the self-selected. It will do nothing to remove the root causes of corruption. Anna and his virtuous brigade have constrained the space for discussion of the contours of economic freedom; in fact, I would not be surprised if they find ways to find more interventionist policies to insert into their draft bill.

Which gives me oodles of time to complete mine, with or without video-taping.

A Business Model for NGOs

My family had a visit from an unusual broker yesterday. An NGO broker.

My mother has been running two charitable ventures for a couple of decades now, and as she is inceasingly conscious of her mortality, is trying to shore them up with more funds, to see them through a leadership transition. For a couple of months now, she has been in telephonic conversation with the lady who came to see her yesterday.

This lady has a neat little business model going:
- she will procure a 35 C exemption certification for your charity. This entitles donors to a 100% tax exemption on donations to the NGO, as against the more common 80 C, which only provids a 50% exemption.
- she will 'arrange' funds - large chunks of it - from corporations with hefty CSR commitments, and no real way to spend it. She named names, but this could be a sales pitch, so I won't document them.
- she will channel 'buybacks' to the company executives who sign off on the donations. What she really meant, I guess, was 'kickbacks'.

My sister, who has also worked in the world of NGOs for 3 decades, asked how the NGOs account for the funds being kicked back. "Uska to raasta sab nikaal letey hain. Badey paise chahiyen, to thodi mahnat karni hi padegi."

When my sister told her that members of our family have run NGOs for decades without any such 'business practices', she said, "Small work you can do. But if you want big money, then you have to do all this". My sister persisted, "Not so small - projects worth 1 or 2 crores."

"May be, but only 1 or 2% are like that." Her business model, she believes, is the norm.

I don't know that is, and I certainly hope it isn't, but it boasts cheerful practitioners like her, who see enough of it around them to believe that it defines the world of NGOS. Scary.

Anchoring Inflationary Expectations

Anchoring inflationary expectations


Anchoring them high that is.

In the preamble to his budget speech, our ineffably cheerful Finance Minister repeatedly referred to both inflation and fiscal consolidation - as well he should, given conditions in our economy. However, aside from wishful thinking, the measures he proposed did nothing to remedy either.

The make-work wages under the NREGA have been linked to the Consumer Price Index; wages for the women who (supposedly) staff 'anganwadis', or child-health centers, have been doubled; the hike in wages of government employees, effective from Jan 1st 2011, will be announced in the next fortnight, and is worked out by a formula linked to the cost of living. All excellent ways to bake inflation into the system.

As regards fiscal consolidation, or reducing the government's excess of expenditure over revenue, the FM heroically announced that this would drop from 4.6%. Doesn't quite add up: the growth in government expenditure, projected at 3.4%, doesn't fit with inflation, rising interest costs, and rising wages. Nor does it take account of inflated oil prices, and the consequent ballooning in subsidies required for our Oil Marketing Companies (OMCs). Staying with subsidies, in the tug of war between Sonia Gandhi's National Advisory Committee (NAC) and her PM's bureacucrats, the latter seemed to have been dragged over the line. Which means that the food subsidy would go up too.

Unless, of course, the Prime Minister throws a few senior managers from the Food Corporation of India into jail. In which case, our bill for rampant leakage of publicly funded grain to the trade will actually subside.

Our markets were relieved that the Finance Minister didn't raise excise duties. The relief lasted less than half the session, and in the end, our stocks were back to roughly where they began. As indeed we are - without a plan to deal with inflation, burgeoning subsidies and ineffective public servants with spiralling cost-to-taxpayer.

What a colossal waste of an opportunity.

Private infrastructure in India doomed by politics

The fast road that connects south Delhi with the sprawling new urb of NOIDA is an excellent example of what the infrastructure of brave new India should be - designed with plenty of headroom for growth, well-maintained, and above all, funded by capital that is serviced by user fees. Sort of.

Last week, NOIDA Toll Bridge Company, a listed company that operates the road, set out a new tariff, that raised the one-way fee for cars from Rs. 20 to Rs. 25. There was a storm of protests, the toll road was blocked by agitators, who threatened to close it down for an indefinite period, and management relented.

Returns on the toll road were below projections in its early years, and the UP state government responded by awarding some real estate concessions to the operator. Now that traffic on the facility is healthy, the capital should be serviced by user fees that keep pace with inflation. Compared to average driving speeds in Delhi, the seamless 7 km. transit to NOIDA saves at least 15 minutes of driving time. In my reckoning, any one who owns a car should be more than happy to pay Rs. 25 for this time-saving alone - that's Rs. 100 per hour.

In India, however, politics, especially the politics of appeasement, always trumps economics, and the tariff for cars is back down to Rs. 20. There goes the Internal Rate of Return (IRR) of the project. This is a horrible signal for those seeking to invest in infrastructure in India, especially at a time when our government is clearly signalling that it has neither the capital, nor the management ability to create modern facilities for a rapidly growing nation.

US House pulls IPCC funding

Republican Rep. Blaine Luetkemeyer was hot about global warming funding. And we quote Luetkemeyer:


“Scientists manipulated climate data, suppressed legitimate arguments in peer-reviewed journals, and researchers were asked to destroy emails, so that a small number of climate alarmists could continue to advance their environmental agenda.

“Since then, more than 700 acclaimed international scientists have challenged the claims made by the IPCC, in this comprehensive 740-page report. These 700 scientists represent some of the most respected institutions at home and around the world, including the U.S. Departments of Energy and Defense, U.S. Air Force and Navy, and even the Environmental Protection Agency.

“For example, famed Princeton University physicist Dr. Robert Austin, who has published 170 scientific papers and was elected a member of the U.S. National Academy of Sciences. Dr. Austin told a congressional committee that, unfortunately, climate has become a political science. It is tragic the some perhaps well-meaning but politically motivated scientists who should know better have whipped up a global frenzy about a phenomenon which is statistically questionable at best.

“Mr. Chairman, if the families in my district have been able to tighten their belts, surely the federal government can do the same and stop funding an organization that is fraught with waste and abuse. My amendment simply says that no funds in this bill can go to the IPCC. This would save taxpayers millions of dollars this year and millions of dollars in years to come. In fact, the President has requested an additional $13 million in his fiscal 2012 budget request.

“My constituents should not have to continue to foot the bill for an organization to keep producing corrupt findings that can be used as justification to impose a massive new energy tax on every American.”

Four words for the House of Representatives:

It. Is. About. Time.

Further (not second) thoughts on the budget

Expect some measures on the revenue side. To my mind, the most likely candidates are excise hikes. Excise duties were cut in the wake of the global recession; by most measures, India has weathered the recession well, and some sectors, like automobiles, have been more than buoyant. It would be politically palatable to reverse - fully or partially -  the drop in excise duties in those sectors where Pranab can politically peddle them as being elitist.

 

Cars, I suspect, would be the first target. In fact, if I wanted to schemingly specific about this, I would hike excise on all cars by x amount, say 4%; but, to compensate for the 'subsidy' on diesel, which is 'needed' for freight, tractors and pumpsets, I would raise the excise on diesel cars by a larger amount, say 6, or 8%.

Budget measures - first thoughts

A week to go for the budget, and Pranab da is talking about fiscal consolidation. Consolidation would be the sensible thing to do, as the GFC is far from done and dusted, and vulnerable countries could yet be shaken down. For a national budget so reliant on borrowings as ours, punishment by bond, or currency, vigilantes could be brutal.

Cuts in spending are highly unlikely; subsidy cuts even more so - whether on food, fuel or fertilisers; worse, the fuel subsidy is an unknown, as crude oil prices remain volatile. Budget balancing would have to be achieved by raising revenue, and to be truly responsible this would have to be sustainable, not one-off gains from auctioning spectrum or stake sals in PSUs.

Direct tax rates are unlikely to go up; in fact, personal income tax threshold levels would have to be raised to compensate for inflation. What would seem to be easiest to do is to raise MAT; lobbies that would normally protest against this are now silenced in the wake of Radiagate. The Congress party, in fact, would gain brownie points by showing how tough it is in terms of shrugging off corporate concerns.

This would not, however, raise much by way of revenue. For this, I would look at an increase in excise duties; this would, in any case, be a reversal of cuts made in late 2008, to fight recession. Now, we have the opposite phenomenon - a recovery which is over-heating the economy. It would make sense to raise excise, especially in industries where the common man is not seen to be impacted. The one I can think of, off the top of my head, is cars. Will try to come up with more.

Learning about dance from my son

Paul Taylor's choreography has a truly American energy and freshness, despite the fact that the man is 80, now.

Dancing for a packed audience at Delhi's Siri Fort on February 18th, his company, Paul Taylor 2, slipped and slid, ran in circles of joy, and in one exquisite, transcendent pas de deux, explored small and large, flitting and fixed, fast and slow, with the diminutive Madelyn Ho an angelic, joyful butterfly to the largest male dancer in the corps.

If the tiny Wu epitomised the cliche of Oriental grace, her Latina colleague, Alana Allende, had a boundless, sometimes explosive energy that seemed to come from the Andean jungles to the Delhi stage, with only the briefest stopover in New York city. In contrast, the male dancers, superbly strong and talented, lacked orchestral colour. A renewed vote for the melting pot.

As a sidelight, I asked my 12-year old son what he made of the show, he said, "It was quite boring, but at least I learned that you can tell a story through dance." Considering that this was expressionist dance, not narrative, I think that was an evening well-spent in his cultural education!