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