Wednesday, December 25, 2013
The soap opera
Gold, onion, rupee, stocks, PSU OFS and tea take centerstage in a riveting 2013
By Mohan Sule
Departures evoke a sense of loss. Yet the closing days of 2013 have triggered no such feeling. On the contrary, the overarching theme is that the worst may be over for India and the world. It could be an illusion but the sense of optimism coincided with the announcement of new faces at the Federal Reserve and the Reserve Bank of India. There is relief that incoming Jane Yellen is of the same old mould as her predecessor and Raghuram Rajan comes without the baggage of obsession with inflation. The composed visage of Yellen and the cheerful countenance of Rajan are in contrast to the tearful scenes being played elsewhere. Some were genuine expressions of sorrow at the death and destruction due to natural calamities: cyclone in Andhra Pradesh and floods in Uttarakhand. Most, however, gave vent to frustration, anger and betrayal. No thanks to these expressions of pent-up emotions, India made to the ranks of the gloomiest nations on earth. That a country viewed as a potential super power and hailed for its vibrant, although chaotic, democracy should descend into despair so soon and so fast could provide enough gist for a fascinating day-time TV drama. If snooping cameras catching bank executives promising to turn black money into legitimate currency afforded a peak into the desperation to boost fee income, it also indicated that traditional banking is no longer viable due to mounting bad loans and that a parallel economy is flourishing despite official protestations.
If confirmation was needed that India is becoming a magnet for hot money, it came from the flight of foreign institutional investors on hints of the Fed reversing its easy money policy on green shoots of recovery in the US, leading to rating agencies to wonder, as usual, retrospectively: was this just a fatal attraction? If the letdown stung the finance minister, already smarting from the hammering of PSU stocks being readied for OFS to fill the revenue kitty, the plunging rupee proved to be the last straw. Sebi’s minimum public shareholding norms for efficient price discovery had the opposite effect of stocks spinning downwards. The balm of Mission to Mars proved a temporary solace. The tears of joy, however, were washed away by the din over whether the country should underwrite the food security bill, especially so when the poor were advised by the heir-in-perpetual-waiting to the country’s oldest ruling dynasty to escape their fate with the velocity of Jupiter. The dry-eyed search for onions that wrecked household budgets had consumers in the same predicament as the government: spending outstripping revenue in a slowing economy. Food items were not the only commodities that left Indians teary-eyed. Gold became the new diva: sought-after by starry-eyed fans for the luminosity but putting off the handlers due to boorish behavior. Investors decamped from gold exchange traded funds, making a beeline to the nearest retailer instead, even as the finance minister and a prime-minister-designate exchanged barbs over the role of the yellow metal in the country’s economic woes.
Unwittingly, this storm in the tea cup has become a metaphor for the raging debate that has captured the imagination of the nation: entitlement v meritocracy. The economic slump has interrupted the middle-class dream of becoming wealthy through education and hard work. The comforting tea has become the unsuspecting beacon of aspiration, and not only for its ability to keep the chill out of an economy gone cold. What permitting controlling stake in multi-brand retail could not achieve, the possibility of a maker of the brew gate-crashing into an exclusive rulers’ club whose predominant members are by dint of their birth did: dissipating the pessimism about India among foreign investors. For a nation weaned on Bollywood potboilers, it is a throwback to the pre-reforms angry-young-man days, when a heroic figure embodying family values and representing the misery of a socialistic society single-handedly took on the entrenched cronyism. This time the difference is that the fight is not to dismantle the system. Rather it is to open the gated community to all. The riveting thriller has had the nation transfixed for the audacity of the plot. The cast of characters includes a sulking patriarch, shadowy aides, gaffe-prone protagonists, friends-turned-into-foes, and historical figures of varying importance in the political discourse. Add a caged parrot singing in his master’s voice to complete the bizarre picture. If ‘nonsense’ describes the irrational exuberance of the Sensex, it also has come to mean rejection of the status quo. No wonder, the passing year resembles a soap opera with plenty of laughs and sighs.
Monday, December 9, 2013
Commitment phobia
Appointing committees to chalk out roadmap for reforms
is meaningless unless the proposals are implemented
By Mohan Sule
The withdrawal of the Tatas from the race to start a bank has triggered a debate on the state of banking in India and the norms for new entrants. Earlier, the manufacturing sector was not entertained based on the historical baggage of the pre-nationalization days. Even as a three-member team headed by Bimal Jalan is sifting through the applications, there is a realization that the attractiveness of founding a bank as a vehicle to raise cheap money comes at a heavy cost of restrictive compliances. The Reserve Bank of India governor’s indication that issuance of bank licenses could be a periodic exercise rather than a one-off affair (10 new banks were set up in 1993 and just two in 2001) not surprisingly failed to generate the euphoria in the stock market triggered by the 2010-11 budget announcement. A perusal of the guidelines reveals that the government basically wants the private sector to replicate PSU banks, which are no great role models. This is typical of India’s liberalization process: erring on the side of the caution. Most often a panel is assembled as a short-term answer to douse a controversy. Resolution of water sharing between states, communal harmony, and disputes over shrines have been assigned to commissions. By the time the report comes out, the issue has lost its potency to cause trouble.
Committees are formed to spell out norms that the policy makers desire but are under pressure not to act due to the sensitivity of the issue: taxation of investment coming from Mauritius puts off a friendly country as well as foreign investors. Issues confounding policy makers, too, are parceled out: eminent members have been empanelled to decide the difference between foreign institutional investment and foreign direct investment. Hindsight wisdom of experts is an expedient answer to plug unexpected loopholes. Taxation of capital gain on transfer of Indian property owned by foreign owners cropped up only after Hutchison Whampoa of Hongkong sold its stake in Indian telecom services provider Hutchison-Essar to Vodafone of the UK. Some issues explode without warning. Differences over microfinance institutions making profit snowballed after Andhra Pradesh banned them. Some issues are ever-evolving, throwing up new challenges. A takeover regulation that is fair to the promoters as well as the minority shareholders is a simmering topic that occupied the minds of many corporate honchos invited by Sebi to participate in solution-finding sessions. With the increase in cross-border deals, the domestic framework has to keep pace with international practices. Another buzz word is corporate governance. Sometimes the aim is to find a middle path. The Nandan Nilelkani committee on cash transfer of subsidies on kerosene, LPG and fertilizer was born out of the government’s desire to continue support the weaker section and at the same time reduce the fiscal deficit. Often the textbook prescriptions spewed out are hard to implement. In such cases, the bitter medicine is put off for another day. For instance, the Kirit Parikh committee on fuel subsidies in 2010 had suggested full deregulation of diesel prices and periodic increase in LPG and PDS kerosene prices.
Another standing committee on finance, headed by former finance minister Yashwant Sinha, ahead of the 2012-13 budget had submitted sensible direct tax proposals that would enlarge the slabs for lower personal tax rates. But these were watered down by then finance minister Pranab Mukherjee. The Goods and Service Tax reform, initiated in 2000 to substitute Central excise duty and state sales tax, is still on paper as there is no consensus on revenue sharing between the states and the Center. The Tarapore committee’s criteria for capital account convertibility in 1997 are yet to be met. Similarly, the Telecom Regulatory Authority of India mooted a 60% cut in the base price of the November 2012 and March 2013 spectrum auctions, which had flopped. Instead it was hiked up to 25%, reflecting the short-term focus of the government on bringing down fiscal deficit. The Bimal Jalan committee in November 2010 did not favour listing of exchanges and wanted a cap on their profit. Sebi rejected the proposal and so also the suggestion that each promoter should hold only 5% equity right at the start instead of over three years. The report of the Vijay Kelkar committee on fiscal consolidation in September 2012 recommended bringing down fiscal deficit to less than 5% of GDP in FY 2014 by a combination of share-sale of state-owned companies, pruning petro-product subsidies and raising prices of diesel and LPG or cooking gas, and execution of GST. The outcome of the failure to do so is amply visible: one of the worst slowdowns in India’s history.
is meaningless unless the proposals are implemented
By Mohan Sule
The withdrawal of the Tatas from the race to start a bank has triggered a debate on the state of banking in India and the norms for new entrants. Earlier, the manufacturing sector was not entertained based on the historical baggage of the pre-nationalization days. Even as a three-member team headed by Bimal Jalan is sifting through the applications, there is a realization that the attractiveness of founding a bank as a vehicle to raise cheap money comes at a heavy cost of restrictive compliances. The Reserve Bank of India governor’s indication that issuance of bank licenses could be a periodic exercise rather than a one-off affair (10 new banks were set up in 1993 and just two in 2001) not surprisingly failed to generate the euphoria in the stock market triggered by the 2010-11 budget announcement. A perusal of the guidelines reveals that the government basically wants the private sector to replicate PSU banks, which are no great role models. This is typical of India’s liberalization process: erring on the side of the caution. Most often a panel is assembled as a short-term answer to douse a controversy. Resolution of water sharing between states, communal harmony, and disputes over shrines have been assigned to commissions. By the time the report comes out, the issue has lost its potency to cause trouble.
Committees are formed to spell out norms that the policy makers desire but are under pressure not to act due to the sensitivity of the issue: taxation of investment coming from Mauritius puts off a friendly country as well as foreign investors. Issues confounding policy makers, too, are parceled out: eminent members have been empanelled to decide the difference between foreign institutional investment and foreign direct investment. Hindsight wisdom of experts is an expedient answer to plug unexpected loopholes. Taxation of capital gain on transfer of Indian property owned by foreign owners cropped up only after Hutchison Whampoa of Hongkong sold its stake in Indian telecom services provider Hutchison-Essar to Vodafone of the UK. Some issues explode without warning. Differences over microfinance institutions making profit snowballed after Andhra Pradesh banned them. Some issues are ever-evolving, throwing up new challenges. A takeover regulation that is fair to the promoters as well as the minority shareholders is a simmering topic that occupied the minds of many corporate honchos invited by Sebi to participate in solution-finding sessions. With the increase in cross-border deals, the domestic framework has to keep pace with international practices. Another buzz word is corporate governance. Sometimes the aim is to find a middle path. The Nandan Nilelkani committee on cash transfer of subsidies on kerosene, LPG and fertilizer was born out of the government’s desire to continue support the weaker section and at the same time reduce the fiscal deficit. Often the textbook prescriptions spewed out are hard to implement. In such cases, the bitter medicine is put off for another day. For instance, the Kirit Parikh committee on fuel subsidies in 2010 had suggested full deregulation of diesel prices and periodic increase in LPG and PDS kerosene prices.
Another standing committee on finance, headed by former finance minister Yashwant Sinha, ahead of the 2012-13 budget had submitted sensible direct tax proposals that would enlarge the slabs for lower personal tax rates. But these were watered down by then finance minister Pranab Mukherjee. The Goods and Service Tax reform, initiated in 2000 to substitute Central excise duty and state sales tax, is still on paper as there is no consensus on revenue sharing between the states and the Center. The Tarapore committee’s criteria for capital account convertibility in 1997 are yet to be met. Similarly, the Telecom Regulatory Authority of India mooted a 60% cut in the base price of the November 2012 and March 2013 spectrum auctions, which had flopped. Instead it was hiked up to 25%, reflecting the short-term focus of the government on bringing down fiscal deficit. The Bimal Jalan committee in November 2010 did not favour listing of exchanges and wanted a cap on their profit. Sebi rejected the proposal and so also the suggestion that each promoter should hold only 5% equity right at the start instead of over three years. The report of the Vijay Kelkar committee on fiscal consolidation in September 2012 recommended bringing down fiscal deficit to less than 5% of GDP in FY 2014 by a combination of share-sale of state-owned companies, pruning petro-product subsidies and raising prices of diesel and LPG or cooking gas, and execution of GST. The outcome of the failure to do so is amply visible: one of the worst slowdowns in India’s history.
Tuesday, December 3, 2013
Forward looking
A bull or a bear phase influences earning estimate and Goldman Sachs’s post-election forecast only reflects this reality
By Mohan Sule
The heat and dust raised by investment bank Goldman Sacchs’s advisory to go overweight on India on indications that Narendra Modi is set to become Prime Minister post May 2014 Lok Sabha polls brings into focus the forward-looking statements made by companies and market intermediaries. The Securities and Exchange Board of India has banned primary market fund-raisers from forecasting financial numbers, restricting them to historical performance. This is to prevent issuers from painting a rosy future to justify over-the-top valuations. However, listed companies as well as analysts tracking them can offer next quarter or full-year guidance. Savvy investors take exposure to a counter on the basis of its capacity going ahead rather than relying solely on the trailing 12-month valuation, which factors in all the possible developments in the period. Only naïve investors will believe that the fluctuation in prices is purely a function of the financial performance of the stock. Companies are vulnerable to external shocks like policy changes and man-made or natural crises at locations of plants and markets. For example, civil turmoil and cyclone. Importers and exporters have to live in fear of foreign exchange volatility that not only tracks domestic fiscal and monetary policies but also global events beyond the control of the country’s policy makers. The rupee plunged on flight of foreign investors following hints by the US Federal Reserve that it might wind up the liquidity injection.
Due to these non-quantifiable variables, projections can go wrong. Even proprietary models can throw up misleading results. This is not solely because there is something amiss in the formulae as predictions cannot be based just on increase in output and orders. The possibility exists of irrational exuberance creeping in during a bull-run or overt cautiousness during a bear phase. The tone and tenor of top managers’response to analysts’ questions during conference calls, too, unwittingly weigh on the analysis. Guerrilla attacks by competitors can disrupt calculations and so also delays in commissioning projects or disruption in production due to labour unrest. Therefore, Goldman Sacchs can be excused if it has based its assessment by combining the euphoria generated by opinion polls capturing Modi’s popularity with historical data that suggest his tenure could result in reduction in corruption and implementation of growth-oriented policies. Some companies maintain a studied silence on ‘sell’ recommendation. The UPA II coalition, particularly the Congress party, instead seems to be behaving like those companies that want a positive spin on their performance despite the current numbers and outlook not justifying such a view. Instead of scolding the investment bank, the focus should be on the warning by rating agency Standard & Poor’s of assigning India to junk status after elections in view of the deteriorating financials, particularly the fiscal deficit.
Just like companies, governments, too, do not take kindly to downgrades. S&P’s US head “resigned” two weeks post the agency revising the sovereign rating of the US to AA plus from AAA in August 2011 after the US Congress voted to raise the debt ceiling. Yet, the dollar held steady due to flight of capital to the US from the euro zone region enveloped in the sovereign debt crisis. No one fears a US default like some Latin American countries earlier. Very few are even willing to consider how the US is going to pay the debt. In fact, during the government shutdown in October this year, S&P did not change the county’s rating. Thus, gut feeling and sentiment can overwhelm scientific data. India is not in the same position as the US. It is still vulnerable to flight of capital, though the external debt, up 21.2% of GDP last fiscal from 19.7% in FY 2012, is considered modest compared with more than 100% of the Asian Tigers during the 1997 currency crisis. However, there is the bottoming-out effect. Trade deficit narrowed to a 30-month low in September 2013. The Reserve Bank of India has attributed the phenomenon to decline in imports of gold and robust exports. However, critics interpret it as fall in demand from industry due to slowdown and boost in realisation due to the depreciation of the rupee. Thus, data can be read both ways. It is likely that economic activity will revive in the next six months on continuation of the Fed’s bond-buying as there is worldwide consensus that an abrupt withdrawal can damage the global economy and recovery in the US and euro zone. The resultant surge in stock prices could be viewed as the percolation of the burst of recent reforms by the government or optimism on the prospects of a Modi-led government.
By Mohan Sule
The heat and dust raised by investment bank Goldman Sacchs’s advisory to go overweight on India on indications that Narendra Modi is set to become Prime Minister post May 2014 Lok Sabha polls brings into focus the forward-looking statements made by companies and market intermediaries. The Securities and Exchange Board of India has banned primary market fund-raisers from forecasting financial numbers, restricting them to historical performance. This is to prevent issuers from painting a rosy future to justify over-the-top valuations. However, listed companies as well as analysts tracking them can offer next quarter or full-year guidance. Savvy investors take exposure to a counter on the basis of its capacity going ahead rather than relying solely on the trailing 12-month valuation, which factors in all the possible developments in the period. Only naïve investors will believe that the fluctuation in prices is purely a function of the financial performance of the stock. Companies are vulnerable to external shocks like policy changes and man-made or natural crises at locations of plants and markets. For example, civil turmoil and cyclone. Importers and exporters have to live in fear of foreign exchange volatility that not only tracks domestic fiscal and monetary policies but also global events beyond the control of the country’s policy makers. The rupee plunged on flight of foreign investors following hints by the US Federal Reserve that it might wind up the liquidity injection.
Due to these non-quantifiable variables, projections can go wrong. Even proprietary models can throw up misleading results. This is not solely because there is something amiss in the formulae as predictions cannot be based just on increase in output and orders. The possibility exists of irrational exuberance creeping in during a bull-run or overt cautiousness during a bear phase. The tone and tenor of top managers’response to analysts’ questions during conference calls, too, unwittingly weigh on the analysis. Guerrilla attacks by competitors can disrupt calculations and so also delays in commissioning projects or disruption in production due to labour unrest. Therefore, Goldman Sacchs can be excused if it has based its assessment by combining the euphoria generated by opinion polls capturing Modi’s popularity with historical data that suggest his tenure could result in reduction in corruption and implementation of growth-oriented policies. Some companies maintain a studied silence on ‘sell’ recommendation. The UPA II coalition, particularly the Congress party, instead seems to be behaving like those companies that want a positive spin on their performance despite the current numbers and outlook not justifying such a view. Instead of scolding the investment bank, the focus should be on the warning by rating agency Standard & Poor’s of assigning India to junk status after elections in view of the deteriorating financials, particularly the fiscal deficit.
Just like companies, governments, too, do not take kindly to downgrades. S&P’s US head “resigned” two weeks post the agency revising the sovereign rating of the US to AA plus from AAA in August 2011 after the US Congress voted to raise the debt ceiling. Yet, the dollar held steady due to flight of capital to the US from the euro zone region enveloped in the sovereign debt crisis. No one fears a US default like some Latin American countries earlier. Very few are even willing to consider how the US is going to pay the debt. In fact, during the government shutdown in October this year, S&P did not change the county’s rating. Thus, gut feeling and sentiment can overwhelm scientific data. India is not in the same position as the US. It is still vulnerable to flight of capital, though the external debt, up 21.2% of GDP last fiscal from 19.7% in FY 2012, is considered modest compared with more than 100% of the Asian Tigers during the 1997 currency crisis. However, there is the bottoming-out effect. Trade deficit narrowed to a 30-month low in September 2013. The Reserve Bank of India has attributed the phenomenon to decline in imports of gold and robust exports. However, critics interpret it as fall in demand from industry due to slowdown and boost in realisation due to the depreciation of the rupee. Thus, data can be read both ways. It is likely that economic activity will revive in the next six months on continuation of the Fed’s bond-buying as there is worldwide consensus that an abrupt withdrawal can damage the global economy and recovery in the US and euro zone. The resultant surge in stock prices could be viewed as the percolation of the burst of recent reforms by the government or optimism on the prospects of a Modi-led government.
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