Money goes round

The strength or weakness of the currency rather than government policies will determine the direction of the market

By Mohan Sule

There is broad agreement among investors that the launch pad of the missiles that torpedoed global stock markets on Black Monday 24 August and Black Tuesday a week later was based in China: a sluggish economy, overheated stock market and devaluation of the currency to remain competitive. However, the contributors responsible for plunging China into a crisis vary. Some blame the overcapacity in its manufacturing sector, a supplier to the world. Others point to the very high savings rate, resulting in a skewed growth of the economy, with investment overshadowing consumption. Whatever may be the factors that led to the meltdown of equities around the globe, some trends are visible from the fallout. The first is not to depend on one market. India’s tech sector suffered due to the slump in demand from the US, its main consumer. Exporters of metals and crude oil to China such as Russia and Brazil are facing the prospect of recession. Investors give better discounting to companies with a diversified product portfolio and user base over those who sell to a few clients and geographies. The second realization is that reliance on exports has a downside, too. The ride is smooth as long as the economies of the importing countries are healthy. The slowdown in the US and recession in many parts of the euro region translated into lower consumption of Made-in-China goods. The third fallout is the acknowledgement that while outsourcing is a great idea to retain flexibility to adapt to changing market moods, the price is importing the customer’s travails. The ripples of the credit crunch in the US post September 2008 were felt across continents. India had to offer fiscal sops on faltering consumption by the growing middle class, riding on the tech and financial services boom fueled by foreign money.

Yet for companies and countries exports signify strength, a stamp of acceptance of the quality of their products and services. The bottom lines of companies, particularly those in economies with weak currency, get an edge over peers. No country is self-reliant and even fully integrated companies have to depend on outside suppliers. The fourth lesson is despite the integration of global economies due to outsourcing and the global stock market rout stemming from China’s problems now and the US mortgage market turmoil earlier, the world is not flat. China’s woes have erupted even as the US economy is recovering and set for its first interest rate hike after the financial crisis. Emerging markets are worried about the outflow of foreign funds. The euro zone has a common currency and a common central bank setting a common monetary policy. The result should be uniformity in prosperity or despair. Germany is thriving but Iceland, Ireland and Greece went bankrupt. If a union formed to allow free flow of financial and human capital, goods and services has failed to be the model for a common market, how can a loosely interconnected global economy dotted by countries with disparate growth systems?

China has embarked on cheap money to prop up the confidence of its consumers and investors. Japan, too, began injecting liquidity even after the Fed stopped its bond-buying program. As a result, the US dollar is getting stronger and other currencies weaker in relation. As if to underscore their unique identities, their decline is not to the same degree. The extent of fall of a currency is in proportion to its economy’s dependence or lack of it on the American and Chinese markets. China had to further depreciate the yuan so as not lose its export edge to those whose currencies had tumbled steeply. The use of currency to retain preeminence leads to the fifth outcome. Monetary policies are the newest weapons in the armory of countries to stake their place in the global economy. RBI governor Raghuram Rajan has warned of currency wars as the rupee slid to the 67 level. The inescapable conclusion is liquidity will determine the direction of the market rather than fiscal policies, which are many times anticipated and discounted by the market ahead of their implementation. The hike in foreign investors’ cap in insurance to 49% was hyped as the most vital reform for India in the post-liberalization era. Subsequently, the revision in the land acquisition law and the passage of the goods and service tax amendment are being touted as the ultimate frontiers to be conquered. In the heat and dust, the market forgot how it sulked for days when increase in FDI limit in multi-brand retail, said to have the potential to open up our economy to a tsunami of foreign exchange, was shot down. Now the focus is back on Fed and RBI rate cuts. This is the sixth takeaway. The market will keep on shifting its goal posts to justify bubble valuations or pathetic discounting.

The action begins

Government v Nestle is an opportunity to shine a light on the regulation of safety standards

By Mohan Sule

The progress of the Union government's class action suit against Nestle India will be keenly watched for many reasons. The legal step will be the first of its kind since the introduction of the concept in the Companies Act, 2013. It could be a test case for similar strikes going ahead. India might soon have its own ambulance chasers, the breed of lawyers ready to spring into action by encouraging users to take on the services provider or the manufacturer responsible for any deficiency. Second is the curiosity to observe the defendant's ability to bounce back post penalty. The damage has been quantified at Rs 640crore (as against Rs 1185 crore net profit made in the year ended December 2014) in the Maggi noodle case. How the figure was arrived is not clear. In many health-related cases, the side-effects take years to manifest. Juries in the US are known to award multi-million-dollar compensation. Cigarette maker Philip Morris was directed in 2006 to pay US$10 billion to plaintiffs. The third will be to assess the impact on investments. The target is an MNC with a long presence in India. As it is India is known to be a tough market to crack. Besides red tape, users are price conscious. Patent infringement is common. Fear of harassment from multiple levels of the state machinery responsible for oversight for any perceived deviation scares off scarce capital. The procedure, therefore, comes at a delicate juncture. India is well positioned to attract investors disillusioned with China. The echoes are still reverberating of the din arising from taxing (US$ 2.5 billion) the capital gains made during the transfer of Hongkong-based Hutchison Telecommunications International's 67% stake in its telecom services joint with Essar to Vodafone's Netherlands subsidiary for US$1.2 1 billion in 2007 and the minimum alternate tax levied on foreign investors retrospectively.

Yet there is a need to display firmness to demonstrate that the Indian market cannot be taken for granted. The resolve gave birth to amendments in regulation to tax capital gains made outside India on transfer of assets in India. Providing the medium of class-action suit is an acknowledgement of the helplessness of consumers in India. The forerunner was the formation of statutory bodies to oversee various markets. The Reserve Bank of India is the banking industry's ombudsman and the Securities and Exchange Board of India of the capital markets. Sebi has of late started the practice of consent decree. Companies under investigation agree to pay a fine without admitting to wrongdoing, thereby preventing years of costly litigation. The Telecom Regulatory Authority of India, the Insurance Regulatory and Development Authority and the Central Electricity Regulatory Commission have been created to monitor niche markets. The Competition Commission of India scotches unfair trade practices. It has penalized many companies including cement makers for cartelization and rigging prices. In the US, the Department of Justice is known to have cracked down on many powerful companies including Microsoft, resulting in a settlement in July 1994, with the software maker agreeing not to tie its products to the sale of Windows.

An antitrust lawsuit blocked AT&T's proposed US $39-billion acquisition of T-Mobile that would have substantially reduced competition for mobile wireless telecommunications services across the US, resulting in higher prices, poorer quality services and fewer choices and innovative products. BP agreed to pay US$ 18.7 billion to settle federal and state claims arising from the 2010 oil spill, the biggest pollution penalty in the US. The European Union is toying on how to tame the all-pervasive Google to create a space for other search engines. An interesting inference is that many companies in legal tangle for their negligence and arrogance are leaders in their market and have enriched shareholders. Most have eventually settled with the litigants to focus on their businesses. The bottom line is that class action suits need not necessarily mean the end of the road for a company. The US Food and Drug Administration routinely blocks shipments from Indian facilities. Serious players take steps to bring their production plants in line with international standards and do not spurn the market instead. Nestle can use the opportunity to shine a light on the substandard government testing facilities in India. The Union minister for food processing has admitted that the inspector raj is resulting in rotting of food grains in warehouses. As the drama is played out in the court, the producers, consumers, the market and the government will get to know how to set right the many wrongs to tap the potential of the industry to the fullest.