With a minimum of fuss, Budget 2014-15 seeks to prepare the economy for the marathon
By Mohan Sule
Right at the beginning of his speech, Finance Minister Arun Jaitley cautioned not to expect too much from a 45-day government. With a short span of seven months for execution before the presentation of a full-fledged budget for the next fiscal, his warning was understandable. Expectation of big-ticket reforms, hence, was unrealistic. Also, the slump in the economy was not due to any policy measures but inaction in clearing projects. The Union Budget 2014-15 aims to assemble a rainbow coalition of the poor; those at the fringes of mainstream society; the farmer; the common man, the aspiring Indian; the middle class; the entrepreneurs; small, medium and big companies; and foreign direct and portfolio investors. The resources-guzzling rural employment guarantee scheme has not been scrapped. It, however, is linked to productive activities, with emphasis on agriculture, thereby ensuring that funds contribute to the GDP. There is promise to tackle fuel and fertilizer subsidies, a big worry for the market, without any timeline. This means there will be small steps in this direction as surging crude prices due to the Iraq crisis and farmers’ precarious state due to weak monsoon have nixed any attempt to fast-track this reform. Overhaul of direct taxes has been done by the Direct Taxes Code and that of indirect taxes will happen when a consensus emerges between the states this year. As such there was no point in going on a road well traveled.
Yet the budget managed to translate all poll promises into policies. There is focus on boosting infrastructure and manufacturing with cuts in excise and import duty, empowering women, putting religious places on the map, bringing the northeast into the mainstream, imparting skills training to the youth, increasing the savings and consumption potential of the middle class, providing 24x7 power supply through 10-year tax holiday to generators and distributors, and improving access to rural areas by building roadways with a fixed daily target. There is interconnectivity between these apparently random allocations. All have the potential to fire up the economy. Prime Minister Narendra Modi has brought into the mainstream sanitation as a catalyst for growth. This does not require large capital but could have a multiplier effect. As the finance minister noted, many countries’ economies solely thrive on tourism. Airports in tier 2 and 3 cities will be a powerful fillip to commerce. Besides directly bolstering the share of services due to the boom in the hospitality industry, indirect beneficiaries will be commodities and family businesses involved in the arts and crafts. Smart cities with low-cost housing will accelerate the process of urbanization of India. Market gain of foreign investors will be on par with that of domestic investors instead of being treated as business income: nil long-term capital gain. Another reason for them to be happy is the promise to keep the fiscal deficit target at 4.1% of GDP, a trigger for soft lending rates. Small investors will get to operate through a single demat account, while small savers get to save more and pay less income tax. For the reform-oriented, FDI ceiling in the defence and insurance sectors has been raised to 49%.
The concern over banks’ health, too, has been addressed. The prescription is recapitalisation through sale of shares and not government-funded infusion, giving them operational autonomy and setting up more debt recovery tribunals. This will ensure that banks become responsible in their lending habits lest these are reflected in the stock prices. An ambitious PSU divestment target of Rs 58425 crore has been fixed for this fiscal. The referring of ongoing legal tussles to a high-powered panel to be constituted by the Central Board of Direct Taxes, though a welcome step, is a throwback to the UPA II era of ruling by committees. Setting up more interactive sessions involving assessees to thrash out knotty problems will be productive only if the solutions are translated into legislations without sacrificing revenue. The period to benefit from long-term capital gain arising from investment in debt mutual funds has been increased to three years and the tax rate doubled under the impression that these vehicles are used predominantly by companies. In fact, many small investors were buying these units of late to escape from equity market volatility. There is also an element of risk as debt funds absorb the fluctuations in interest rates quickly. This proposal could have been made applicable for investment undertaken after the budget. Overall, the budget has avoided any controversial proposals. In Congress vice president Rahul Gandhi’s words, there are no pulse-quickening measures. Perhaps his pulse will race when India is firmly on the double-digit expansion path within five years.
Thursday, July 31, 2014
Wednesday, July 23, 2014
Cautious love
Instead of big-bang reforms, indications are of incremental opening up in a balancing act
By Mohan Sule
Prime Minister Narendra Modi is a man in a hurry. He has to undo in 60 months the mess that took Congress 60 years to perpetuate. He has to exhibit decisiveness instead of silence, vest the PMO with the powers that had been usurped by parallel power centers, demolish votebank politics, put nation before party and propel India on the path to prosperity. In trying to achieve this, he warned, he would turn unpopular from being merely polarizing. Eventually, he admitted unabashedly, he would win over the love of his country. For the electorate who had backed Modi with a massive mandate in the hope of good days of low prices, 24 hours of power supply, whizzing away in bullet trains, living in smart cities, cheap healthcare, clean rivers and jobs aplenty, the tune did sound jarring. The first dose of the bitter medicine was an increase in passenger and freight fares. Sugar prices spurted on hike in import duty to fetch domestic producers, saddled with debt and unable to pay cane farmers, better prices. While users groaned, the market applauded the steps, once again crossing the 25,000 mark after slipping on worries of spurt in crude oils prices due to the civil war in Iraq. Railway-related and sugar stocks surged. Diesel prices have been rising by 50 paise per month and PSU oil marketing companies are buoyant on hopes of deregulation. The IPO market is stirring with buzz about PSUs and private sector companies lining up for stake-sale.
Despite the revival in business confidence, major challenges remain. Inflation is a key concern. The wholesale price index touched a five-month high in May 2014. The threat of El Nino is real. The southwest monsoon had remained elusive till end June. Onions are proving to be tearjerkers. There is talk of action against hoarders. The partial rollback in Mumbai’s suburban train fares shows the tough task ahead. It looks like an incremental approach to reforms will have to be adopted. Elections are due later this year and next in important states such as Maharashtra, Haryana, Jharkhand, Jammu & Kashmir, Bihar and possibly Uttar Pradesh. Yet Modi should not fear of becoming unpopular. Voters braved above 40-degree centigrade temperature to put him into power with a simple majority. The election conclusively rejected the welfare model of governance, which was considered necessary to get elected. Despite food security right and guarantee of rural jobs, India has opted for an economy that creates growth and not the one that barely meets basic needs courtesy the dole-outs of the government. As Modi has reiterated, development has to be a mass movement like the freedom movement. He should use the example of telecom and two-wheelers to illustrate how a free market can benefit the users through choice and lower prices in contrast to shortages created by controlled pricing. Similarly, higher fuel prices will enable oil explorers and refiners to spend on exploration, leading to higher output. Oil marketing companies can use the money to increase their reach. On the flip side is the anemic sugar industry, with restrictions on cane pricing and selling output.
Besides the direct benefit of market demand-supply determining prices, there are three indirect advantages of phasing out subsidies. The government has to resort often to market borrowing to bridge the cost of selling subsidized goods and services because there is resistance to raising taxes to meet the revenue and expenditure mismatch. Its appetite overshadows the needs of the private sector in the capital market. The diminishing presence of the government would leave more money on the table for companies to fund their requirements and, thereby, lower the cost of borrowing. Softer interest rates will spur consumption and bolster the bottom lines of companies and spur job creation. The burden of higher fuel prices would be made bearable by cheaper credit and brightening job prospects. Ramping up of Railway fare would make the network efficient and enable it to increase coverage. Higher ticket prices could see diversion of some long-distance travelers to airlines, which are expected to see heightened competition. Subsidy paring will be viewed favorably by credit rating agencies and result in country up-gradation to investment-grade from near-junk status. This would accelerate the inflow of foreign investments. In fact, India could pay a crucial role in accelerating global recovery, with the country’s hunger for goods and services from the developed world and China increasing. The negative effect of the appreciation of the rupee due to foreign inflows, thus, could be blunted for export-oriented companies, whose main market is the US. The aftereffects would be felt in the medium to long term but the short-term impact of soft interest rates will provide the trigger.
By Mohan Sule
Prime Minister Narendra Modi is a man in a hurry. He has to undo in 60 months the mess that took Congress 60 years to perpetuate. He has to exhibit decisiveness instead of silence, vest the PMO with the powers that had been usurped by parallel power centers, demolish votebank politics, put nation before party and propel India on the path to prosperity. In trying to achieve this, he warned, he would turn unpopular from being merely polarizing. Eventually, he admitted unabashedly, he would win over the love of his country. For the electorate who had backed Modi with a massive mandate in the hope of good days of low prices, 24 hours of power supply, whizzing away in bullet trains, living in smart cities, cheap healthcare, clean rivers and jobs aplenty, the tune did sound jarring. The first dose of the bitter medicine was an increase in passenger and freight fares. Sugar prices spurted on hike in import duty to fetch domestic producers, saddled with debt and unable to pay cane farmers, better prices. While users groaned, the market applauded the steps, once again crossing the 25,000 mark after slipping on worries of spurt in crude oils prices due to the civil war in Iraq. Railway-related and sugar stocks surged. Diesel prices have been rising by 50 paise per month and PSU oil marketing companies are buoyant on hopes of deregulation. The IPO market is stirring with buzz about PSUs and private sector companies lining up for stake-sale.
Despite the revival in business confidence, major challenges remain. Inflation is a key concern. The wholesale price index touched a five-month high in May 2014. The threat of El Nino is real. The southwest monsoon had remained elusive till end June. Onions are proving to be tearjerkers. There is talk of action against hoarders. The partial rollback in Mumbai’s suburban train fares shows the tough task ahead. It looks like an incremental approach to reforms will have to be adopted. Elections are due later this year and next in important states such as Maharashtra, Haryana, Jharkhand, Jammu & Kashmir, Bihar and possibly Uttar Pradesh. Yet Modi should not fear of becoming unpopular. Voters braved above 40-degree centigrade temperature to put him into power with a simple majority. The election conclusively rejected the welfare model of governance, which was considered necessary to get elected. Despite food security right and guarantee of rural jobs, India has opted for an economy that creates growth and not the one that barely meets basic needs courtesy the dole-outs of the government. As Modi has reiterated, development has to be a mass movement like the freedom movement. He should use the example of telecom and two-wheelers to illustrate how a free market can benefit the users through choice and lower prices in contrast to shortages created by controlled pricing. Similarly, higher fuel prices will enable oil explorers and refiners to spend on exploration, leading to higher output. Oil marketing companies can use the money to increase their reach. On the flip side is the anemic sugar industry, with restrictions on cane pricing and selling output.
Besides the direct benefit of market demand-supply determining prices, there are three indirect advantages of phasing out subsidies. The government has to resort often to market borrowing to bridge the cost of selling subsidized goods and services because there is resistance to raising taxes to meet the revenue and expenditure mismatch. Its appetite overshadows the needs of the private sector in the capital market. The diminishing presence of the government would leave more money on the table for companies to fund their requirements and, thereby, lower the cost of borrowing. Softer interest rates will spur consumption and bolster the bottom lines of companies and spur job creation. The burden of higher fuel prices would be made bearable by cheaper credit and brightening job prospects. Ramping up of Railway fare would make the network efficient and enable it to increase coverage. Higher ticket prices could see diversion of some long-distance travelers to airlines, which are expected to see heightened competition. Subsidy paring will be viewed favorably by credit rating agencies and result in country up-gradation to investment-grade from near-junk status. This would accelerate the inflow of foreign investments. In fact, India could pay a crucial role in accelerating global recovery, with the country’s hunger for goods and services from the developed world and China increasing. The negative effect of the appreciation of the rupee due to foreign inflows, thus, could be blunted for export-oriented companies, whose main market is the US. The aftereffects would be felt in the medium to long term but the short-term impact of soft interest rates will provide the trigger.
Wednesday, July 16, 2014
The don’ts
What a government does not do can reveal as much about its intentions as what it does
By Mohan Sule
Prime Minister Narendra Modi has received a bucketful of advice on what he must do to shake up the economy. In governance, what you do not do is equally important as what you do. Most federal bank governors in the world are reticent and confine to releasing quarterly reviews and outlook lest any of their remarks is wrongly interpreted by the money markets. There is no place for bravado while acting to tame inflation, boost growth, and restore investor confidence. From his first few days in office, it is evident that Modi is not going to practice some of the rhetorical flourishes of his campaign. He did not bow down to pressure from allies on the presence of Pakistan’s prime minister and Srilanka’s president at his inauguration. In the same way, he should not equate the strength of the rupee with India’s might in the global order. The import bill would surely come down if the Indian currency appreciates significantly but so will export earning. Just as inflation, its level hinges on the economic policies of the government. Tweaking of interest rates and intervention in the foreign exchange market by the Reserve Bank of India are merely firefighting exercises. The September 2008 global credit crisis has demonstrated that a currency is capable of moving due to factors beyond the control of the government and the central bank. Besides, what should be the level of the rupee is a debatable question.
One of the prime reasons for the defeat of Congress in the April-May general election was surging consumer prices. The new government is under pressure to tame inflation. In a report commissioned by the UPA I government early during its tenure, Modi had recommended crackdown on hoarders and clearing distributing bottlenecks. As such he is bound to implement his own suggestions. What he should not do is to pressurize the central bank to lower interest rates. Soft lending rates will no doubt boost consumption and trigger investment revival. The downside is these will not be sustainable. The release of pent-up demand and lag effect in ensuring availability could push up prices again. Instead the prime minister should let the RBI take a call, restricting himself to tackling supply-side issues and policy on minimum support prices for food grains. This hands-off approach should extend to scamsters, some of whom have political connections. The promoters of Sahara and NSEL are currently behind bars, accused of duping investors of crores of rupees. The then ruling dispensation at the Centre tried to ensnare the chief minister of Gujarat in many cases. In the end, Modi emerged triumphant by allowing the law to take its course. He should allow the wheels of justice to determine the fate of Subrata Roy and Jignesh Shah. Similarly, the prime minister should not be seen favouring any industrial group. The test case will be pricing of RIL’s gas. The previous government had okayed a hike to be implemented from April but deferred due to the Lok Sabha polls. A rollback will be a popular move but offer temporary respite as pricing of any commodity is not static and has to incorporate demand and supply. Not acting would be capitalized by opposition and could contribute to inflation. Modi should neither try to appease the consumers, which include Reliance Power, or the producer but take a long-term view that would ensure steady supply at reasonable price.
It would not be wrong to say that the UPA II government was ruled by committees. Within the cabinet, there were empowered groups of ministers, now abolished, to decide on sensitive policies. Another fad was appointing commissions to come out with reports on controversial subjects. The government does need expert advice from time to time. With the wisdom of hindsight, it is now clear that the findings can be tailored by packing the panel with members tilted towards a particular view. On many occasions the recommendations of the committees have been junked for being too radical or not suited to the prevalent political climate. Modi has positioned himself as decisive. Hence, he should not fall prey to the temptation of passing the buck. The electorate should know that, in whatever way it was arrived, the decision has his stamp of approval. Last, never should the prime minister say that he does not lose sleep over stock market volatility, like Manmohan Singh famously did during his stint as finance minister. The capital market is a measure of the health of the country. Transparent, forward-looking, and stable policies are essential for issuers and consumers of capital, who are necessary to create jobs, one of the objectives of the prime minister. A robust primary and secondary market is the best gauge for Modi to measure the success of his development agenda.
By Mohan Sule
Prime Minister Narendra Modi has received a bucketful of advice on what he must do to shake up the economy. In governance, what you do not do is equally important as what you do. Most federal bank governors in the world are reticent and confine to releasing quarterly reviews and outlook lest any of their remarks is wrongly interpreted by the money markets. There is no place for bravado while acting to tame inflation, boost growth, and restore investor confidence. From his first few days in office, it is evident that Modi is not going to practice some of the rhetorical flourishes of his campaign. He did not bow down to pressure from allies on the presence of Pakistan’s prime minister and Srilanka’s president at his inauguration. In the same way, he should not equate the strength of the rupee with India’s might in the global order. The import bill would surely come down if the Indian currency appreciates significantly but so will export earning. Just as inflation, its level hinges on the economic policies of the government. Tweaking of interest rates and intervention in the foreign exchange market by the Reserve Bank of India are merely firefighting exercises. The September 2008 global credit crisis has demonstrated that a currency is capable of moving due to factors beyond the control of the government and the central bank. Besides, what should be the level of the rupee is a debatable question.
One of the prime reasons for the defeat of Congress in the April-May general election was surging consumer prices. The new government is under pressure to tame inflation. In a report commissioned by the UPA I government early during its tenure, Modi had recommended crackdown on hoarders and clearing distributing bottlenecks. As such he is bound to implement his own suggestions. What he should not do is to pressurize the central bank to lower interest rates. Soft lending rates will no doubt boost consumption and trigger investment revival. The downside is these will not be sustainable. The release of pent-up demand and lag effect in ensuring availability could push up prices again. Instead the prime minister should let the RBI take a call, restricting himself to tackling supply-side issues and policy on minimum support prices for food grains. This hands-off approach should extend to scamsters, some of whom have political connections. The promoters of Sahara and NSEL are currently behind bars, accused of duping investors of crores of rupees. The then ruling dispensation at the Centre tried to ensnare the chief minister of Gujarat in many cases. In the end, Modi emerged triumphant by allowing the law to take its course. He should allow the wheels of justice to determine the fate of Subrata Roy and Jignesh Shah. Similarly, the prime minister should not be seen favouring any industrial group. The test case will be pricing of RIL’s gas. The previous government had okayed a hike to be implemented from April but deferred due to the Lok Sabha polls. A rollback will be a popular move but offer temporary respite as pricing of any commodity is not static and has to incorporate demand and supply. Not acting would be capitalized by opposition and could contribute to inflation. Modi should neither try to appease the consumers, which include Reliance Power, or the producer but take a long-term view that would ensure steady supply at reasonable price.
It would not be wrong to say that the UPA II government was ruled by committees. Within the cabinet, there were empowered groups of ministers, now abolished, to decide on sensitive policies. Another fad was appointing commissions to come out with reports on controversial subjects. The government does need expert advice from time to time. With the wisdom of hindsight, it is now clear that the findings can be tailored by packing the panel with members tilted towards a particular view. On many occasions the recommendations of the committees have been junked for being too radical or not suited to the prevalent political climate. Modi has positioned himself as decisive. Hence, he should not fall prey to the temptation of passing the buck. The electorate should know that, in whatever way it was arrived, the decision has his stamp of approval. Last, never should the prime minister say that he does not lose sleep over stock market volatility, like Manmohan Singh famously did during his stint as finance minister. The capital market is a measure of the health of the country. Transparent, forward-looking, and stable policies are essential for issuers and consumers of capital, who are necessary to create jobs, one of the objectives of the prime minister. A robust primary and secondary market is the best gauge for Modi to measure the success of his development agenda.
Wednesday, July 2, 2014
The dilemma
Should the new CEO be the face of Infosys or should it remain a faceless company?
By Mohan Sule
The surgery was quick but not painless. A year after being recalled from retirement to head the company he co-promoted, N R Narayana Murthy is making his second exit, scotching apprehension that he was grooming his son to take over. The nearly dozen top-deck departures appear to be the collateral damage of the shakeup to allow the new CEO and MD to begin on a clean slate. Is the worst over for Infosys? Shares looked up on buzz of a buyback and in the run-up to the appointment of a new captain. It is now clear that Murthy’s comeback was necessary for a company that had become complacent. Since his stepping down on 20 August 2006 on attaining 60 years, the stock had underperformed the broad market, the sector index as well as its peers till Murthy returned last year. Since then, it has outperformed the market though return lags in comparision with competitors. A stock’s behavior against the broad benchmark is a widely-used criterion to measure a boss’s success. On that count, Murthy has not disappointed. Nonetheless, it is puzzling why the market panicked at the high-level resignations. The executive turmoil should have been greeted favourably as it enabled the outgoing executive chairman to pick the best person to lead the company. However, the market has greeted the end of Murthy’s short reign with relief, a surprising reaction to a person who was the face of Infosys.
This throws up a contradictory picture of investors wanting stability as well as restructuring in troubled companies. Mass exodus of senior managers is frowned upon but low- and mid-end staff retrenchment is welcomed as a cost-cutting measure. The attitude to promoters, too, is ambivalent. Murthy’s comeback was met with concern that the symbol of India’s outsourcing sucess was going to become one of those family-run firms. Yet, investors derive comfort from promoters holding sizeable equity, which ensures that they remain engage with their businesses. No one expects promoters owning a controlling stake of a company going through a rough patch to step aside. Imagine the market reaction if Anil Ambani were to relinquish charge for the losses at RCom or Ratan Tata were to step down taking responsibility for the misery of the shareholders of Tata Motors and Tata Steel following the costly acquisitions of UK-based Jaguar and Land Rover and Corus. Rather than viewing Murthy’s return as essential to put the company back on track, it was construed as a reiteration of its slide. This is in contrast to the reaction to the sacking of founder Steve Jobs by Apple’s board for his expensive habits. One reason for the market’s different outlook to companies controlled by families and those run by managers could be that most old-fashioned groups are in commodity businesses, where cyclical ups and downs rather than the management style determine profitability. No wonder the FMCG and pharmaceutical sectors, where marketing and product reinvention are crucial, are dominated by MNCs and first-generation entrepreneurs. The governance bar for these promoters is set higher than for those in the business where proximity to the government is important.
Circumstances also play a role. Murthy retired in 2006, when the bull run was gaining momentum. Three years later, the global credit crisis hit Infosys’s main market, the US. There hardly has been a blip since Tata stepped down in favour of his chosen heir Cyrus Mistry, whose ascension coincides with global recovery as is evident from the turnaround in the market’s sentiment towards Tata Motors and Tata Steel. Apple’s stock has lost luster partly after the founder’s demise and also due to intensifying competition. At the same time, Samsung has been going from strength to strength despite lack of name recognition for its CEO. Why is this so? Apple is known for its innovations, while Samsung caters to the cost-conscious market with me-too products. When the Indian tech sector was in the nascent stage and corporate governance unheard of, the differentiator was the credibility of promoters to deliver quality services on time. At that stage, Murthy’s pioneering practice of making employees stakeholders and nipping the prevalent fashion of inducting family members and relying on meritocracy instead resonated with investors in the first flush of liberalization. Outsourcing is now becoming a generic business, where the focus is on clinching deals while protecting the margin. So Infosys has to decide whether it wants to be another Apple closely identified with its promoter but known for its innovations or another Samsung, where the systems are so well entrenched that who the CEO is hardly matters.
By Mohan Sule
The surgery was quick but not painless. A year after being recalled from retirement to head the company he co-promoted, N R Narayana Murthy is making his second exit, scotching apprehension that he was grooming his son to take over. The nearly dozen top-deck departures appear to be the collateral damage of the shakeup to allow the new CEO and MD to begin on a clean slate. Is the worst over for Infosys? Shares looked up on buzz of a buyback and in the run-up to the appointment of a new captain. It is now clear that Murthy’s comeback was necessary for a company that had become complacent. Since his stepping down on 20 August 2006 on attaining 60 years, the stock had underperformed the broad market, the sector index as well as its peers till Murthy returned last year. Since then, it has outperformed the market though return lags in comparision with competitors. A stock’s behavior against the broad benchmark is a widely-used criterion to measure a boss’s success. On that count, Murthy has not disappointed. Nonetheless, it is puzzling why the market panicked at the high-level resignations. The executive turmoil should have been greeted favourably as it enabled the outgoing executive chairman to pick the best person to lead the company. However, the market has greeted the end of Murthy’s short reign with relief, a surprising reaction to a person who was the face of Infosys.
This throws up a contradictory picture of investors wanting stability as well as restructuring in troubled companies. Mass exodus of senior managers is frowned upon but low- and mid-end staff retrenchment is welcomed as a cost-cutting measure. The attitude to promoters, too, is ambivalent. Murthy’s comeback was met with concern that the symbol of India’s outsourcing sucess was going to become one of those family-run firms. Yet, investors derive comfort from promoters holding sizeable equity, which ensures that they remain engage with their businesses. No one expects promoters owning a controlling stake of a company going through a rough patch to step aside. Imagine the market reaction if Anil Ambani were to relinquish charge for the losses at RCom or Ratan Tata were to step down taking responsibility for the misery of the shareholders of Tata Motors and Tata Steel following the costly acquisitions of UK-based Jaguar and Land Rover and Corus. Rather than viewing Murthy’s return as essential to put the company back on track, it was construed as a reiteration of its slide. This is in contrast to the reaction to the sacking of founder Steve Jobs by Apple’s board for his expensive habits. One reason for the market’s different outlook to companies controlled by families and those run by managers could be that most old-fashioned groups are in commodity businesses, where cyclical ups and downs rather than the management style determine profitability. No wonder the FMCG and pharmaceutical sectors, where marketing and product reinvention are crucial, are dominated by MNCs and first-generation entrepreneurs. The governance bar for these promoters is set higher than for those in the business where proximity to the government is important.
Circumstances also play a role. Murthy retired in 2006, when the bull run was gaining momentum. Three years later, the global credit crisis hit Infosys’s main market, the US. There hardly has been a blip since Tata stepped down in favour of his chosen heir Cyrus Mistry, whose ascension coincides with global recovery as is evident from the turnaround in the market’s sentiment towards Tata Motors and Tata Steel. Apple’s stock has lost luster partly after the founder’s demise and also due to intensifying competition. At the same time, Samsung has been going from strength to strength despite lack of name recognition for its CEO. Why is this so? Apple is known for its innovations, while Samsung caters to the cost-conscious market with me-too products. When the Indian tech sector was in the nascent stage and corporate governance unheard of, the differentiator was the credibility of promoters to deliver quality services on time. At that stage, Murthy’s pioneering practice of making employees stakeholders and nipping the prevalent fashion of inducting family members and relying on meritocracy instead resonated with investors in the first flush of liberalization. Outsourcing is now becoming a generic business, where the focus is on clinching deals while protecting the margin. So Infosys has to decide whether it wants to be another Apple closely identified with its promoter but known for its innovations or another Samsung, where the systems are so well entrenched that who the CEO is hardly matters.
Wednesday, June 18, 2014
The don’ts
What a government does not do can reveal as much about its intentions as what it does
By Mohan Sule
Prime Minister Narendra Modi has received a bucketful of advice on what he must do to shake up the economy. In governance, what you do not do is equally important as what you do. Most federal bank governors in the world are reticent and confine to releasing quarterly reviews and outlook lest any of their remarks is wrongly interpreted by the money markets. There is no place for bravado while acting to tame inflation, boost growth, and restore investor confidence. From his first few days in office, it is evident that Modi is not going to practice some of the rhetorical flourishes of his campaign. He did not bow down to pressure from allies on the presence of Pakistan’s prime minister and Srilanka’s president at his inauguration. In the same way, he should not equate the strength of the rupee with India’s might in the global order. The import bill would surely come down if the Indian currency appreciates significantly but so will export earning. Just as inflation, its level hinges on the economic policies of the government. Tweaking of interest rates and intervention in the foreign exchange market by the Reserve Bank of India are merely firefighting exercises. The September 2008 global credit crisis has demonstrated that a currency is capable of moving due to factors beyond the control of the government and the central bank. Besides, what should be the level of the rupee is a debatable question.
One of the prime reasons for the defeat of Congress in the April-May general election was surging consumer prices. The new government is under pressure to tame inflation. In a report commissioned by the UPA I government early during its tenure, Modi had recommended crackdown on hoarders and clearing distributing bottlenecks. As such he is bound to implement his own suggestions. What he should not do is to pressurize the central bank to lower interest rates. Soft lending rates will no doubt boost consumption and trigger investment revival. The downside is these will not be sustainable. The release of pent-up demand and lag effect in ensuring availability could push up prices again. Instead the prime minister should let the RBI take a call, restricting himself to tackling supply-side issues and policy on minimum support prices for food grains. This hands-off approach should extend to scamsters, some of whom have political connections. The promoters of Sahara and NSEL are currently behind bars, accused of duping investors of crores of rupees. The then ruling dispensation at the Centre tried to ensnare the chief minister of Gujarat in many cases. In the end, Modi emerged triumphant by allowing the law to take its course. He should allow the wheels of justice to determine the fate of Subrata Roy and Jignesh Shah. Similarly, the prime minister should not be seen favouring any industrial group. The test case will be pricing of RIL’s gas. The previous government had okayed a hike to be implemented from April but deferred due to the Lok Sabha polls. A rollback will be a popular move but offer temporary respite as pricing of any commodity is not static and has to incorporate demand and supply. Not acting would be capitalized by opposition and could contribute to inflation. Modi should neither try to appease the consumers, which include Reliance Power, or the producer but take a long-term view that would ensure steady supply at reasonable price.
It would not be wrong to say that the UPA II government was ruled by committees. Within the cabinet, there were empowered groups of ministers, now abolished, to decide on sensitive policies. Another fad was appointing commissions to come out with reports on controversial subjects. The government does need expert advice from time to time. With the wisdom of hindsight, it is now clear that the findings can be tailored by packing the panel with members tilted towards a particular view. On many occasions the recommendations of the committees have been junked for being too radical or not suited to the prevalent political climate. Modi has positioned himself as decisive. Hence, he should not fall prey to the temptation of passing the buck. The electorate should know that, in whatever way it was arrived, the decision has his stamp of approval. Last, never should the prime minister say that he does not lose sleep over stock market volatility, like Manmohan Singh famously did during his stint as finance minister. The capital market is a measure of the health of the country. Transparent, forward-looking, and stable policies are essential for issuers and consumers of capital, who are necessary to create jobs, one of the objectives of the prime minister. A robust primary and secondary market is the best gauge for Modi to measure the success of his development agenda.
By Mohan Sule
Prime Minister Narendra Modi has received a bucketful of advice on what he must do to shake up the economy. In governance, what you do not do is equally important as what you do. Most federal bank governors in the world are reticent and confine to releasing quarterly reviews and outlook lest any of their remarks is wrongly interpreted by the money markets. There is no place for bravado while acting to tame inflation, boost growth, and restore investor confidence. From his first few days in office, it is evident that Modi is not going to practice some of the rhetorical flourishes of his campaign. He did not bow down to pressure from allies on the presence of Pakistan’s prime minister and Srilanka’s president at his inauguration. In the same way, he should not equate the strength of the rupee with India’s might in the global order. The import bill would surely come down if the Indian currency appreciates significantly but so will export earning. Just as inflation, its level hinges on the economic policies of the government. Tweaking of interest rates and intervention in the foreign exchange market by the Reserve Bank of India are merely firefighting exercises. The September 2008 global credit crisis has demonstrated that a currency is capable of moving due to factors beyond the control of the government and the central bank. Besides, what should be the level of the rupee is a debatable question.
One of the prime reasons for the defeat of Congress in the April-May general election was surging consumer prices. The new government is under pressure to tame inflation. In a report commissioned by the UPA I government early during its tenure, Modi had recommended crackdown on hoarders and clearing distributing bottlenecks. As such he is bound to implement his own suggestions. What he should not do is to pressurize the central bank to lower interest rates. Soft lending rates will no doubt boost consumption and trigger investment revival. The downside is these will not be sustainable. The release of pent-up demand and lag effect in ensuring availability could push up prices again. Instead the prime minister should let the RBI take a call, restricting himself to tackling supply-side issues and policy on minimum support prices for food grains. This hands-off approach should extend to scamsters, some of whom have political connections. The promoters of Sahara and NSEL are currently behind bars, accused of duping investors of crores of rupees. The then ruling dispensation at the Centre tried to ensnare the chief minister of Gujarat in many cases. In the end, Modi emerged triumphant by allowing the law to take its course. He should allow the wheels of justice to determine the fate of Subrata Roy and Jignesh Shah. Similarly, the prime minister should not be seen favouring any industrial group. The test case will be pricing of RIL’s gas. The previous government had okayed a hike to be implemented from April but deferred due to the Lok Sabha polls. A rollback will be a popular move but offer temporary respite as pricing of any commodity is not static and has to incorporate demand and supply. Not acting would be capitalized by opposition and could contribute to inflation. Modi should neither try to appease the consumers, which include Reliance Power, or the producer but take a long-term view that would ensure steady supply at reasonable price.
It would not be wrong to say that the UPA II government was ruled by committees. Within the cabinet, there were empowered groups of ministers, now abolished, to decide on sensitive policies. Another fad was appointing commissions to come out with reports on controversial subjects. The government does need expert advice from time to time. With the wisdom of hindsight, it is now clear that the findings can be tailored by packing the panel with members tilted towards a particular view. On many occasions the recommendations of the committees have been junked for being too radical or not suited to the prevalent political climate. Modi has positioned himself as decisive. Hence, he should not fall prey to the temptation of passing the buck. The electorate should know that, in whatever way it was arrived, the decision has his stamp of approval. Last, never should the prime minister say that he does not lose sleep over stock market volatility, like Manmohan Singh famously did during his stint as finance minister. The capital market is a measure of the health of the country. Transparent, forward-looking, and stable policies are essential for issuers and consumers of capital, who are necessary to create jobs, one of the objectives of the prime minister. A robust primary and secondary market is the best gauge for Modi to measure the success of his development agenda.
Thursday, June 5, 2014
Selling Mr Modi
Did the campaign draw inspiration from corporate marketing or should companies learn from his strategies?
By Mohan Sule
The recent election to the Lok Sabha was remarkable in many ways. First, the campaign was turned into a referendum on an opposition leader rather than on the ruling party. Second was the combining of non-traditional platforms such as social media with the old fashion way of logging miles. Third was the strategy of tarring rivals. The question at hindsight is if political parties drew lessons from companies’ marketing tactics or is there a lesson for Corporate India in the way the war rooms were analyzing ground-level feedback and organizing logistics for an intricate schedule of rallies across the country? Many inferences can be drawn from the successful culmination of Narendra Modi’s journey to prime minister. First, a product’s local fame can be leveraged nationally with good marketing. Amul has become a pan India brand from being a Made-in-Gujarat variety due to its superior distribution network. However, mass selling should not diffuse product differentiation. This is the second lesson. In a country where politicians prefer the easy way of emotive appeal of religion and caste, Modi propagated development to stand apart. This approach works if it is backed by user experience. Reports suggest that the Modi wave in north India was not just a by-product of hype but also the result of testimonials of migrants from this region about the opportunities and uninterrupted power supply in Gujarat.
Actions, rather than words, reinforce an image is the third lesson. In their bid to blunt Modi’s talked-about administrative acumen, opponents used comparative advertising to show that other states were better on some social indicators. Indirectly, the debate ensured that the Gujarat model remained in the news. For the young voters hungry for jobs, the uniqueness was that Modi welcomed business investment. The contrast became stark against the backdrop of huge projects getting stuck for want of environmental clearances even as the UPA government was spending on giveaways. Modi demonstrated decisiveness when he quickly seized the opportunity presented by the agitating farmers of Singur, West Bengal, by welcoming Tatas’ Nano project. On the other hand, Rahul Gandhi’s pro-tribal stand on the troubled Posco mining project in Orissa strengthened the perception that he preferred populist posturing. While assigning valuations to stocks, the market, too, takes into account management credibility. Infrastructure companies are viewed with caution due to their dependence on government contracts. Technology and pharma companies get better discounting as they cater to the fussy developed markets. Similarly, a stock showing a sudden spurt in prices raises suspicion. While Modi’s more than 10-year track record as chief minister of Gujarat could be examined and debated, Rahul was thrust as a fresh face that the country should rely on. The hitch was that the electorate viewed him as part of the problem rather than the solution. After his criticism resulted in the withdrawal of the ordinance that would have allowed convicted politicians to contest polls, he could no longer position himself as an outsider. Voters read his inaction for most of the decade-long UPA rule either as indifference to the policy paralysis or as covert support to various ministers’ acts of omission and commission. The fourth lesson, therefore, is that consumers are open to experiment with innovations but not those merely packaged as new.
The message has to be tailored to the market. When HUL was blindsided by low-end Nirma washing powder, the leader in the premium segment hit back with its own cheaper brands. Similarly, the FMCG sector’s experiment with sachets for the small and rural users has turned out be a roaring success. Starting off with the development agenda in urban and semi-urban areas in the first half of the long election schedule, Modi switched track to his humble beginning as a tea seller. The fifth lesson is widely practised in the consumer durables segment. Automobile manufacturers produce a range of vehicles for the premium segment and the common man. The last lesson is that running down competitors should be based on facts that are not open to any other interpretation. Harping on Modi’s largesse of giving land cheaply to the Adani group did not resonate among educated urban voters who knew that the price of an immovable asset depends on its location. So the alleged setback to the exchequer on this account was not comparable with the revenue loss suffered due to selling telecom spectrum and coal blocks to cronies at throwaway prices. In fact, Rahul’s attempt to provoke outrage boomeranged as it triggered association with his brother-in-law’s dealings in real estate. In the end, it is sometimes better to sacrifice the pawns rather than expose the Queen by rash moves.
By Mohan Sule
The recent election to the Lok Sabha was remarkable in many ways. First, the campaign was turned into a referendum on an opposition leader rather than on the ruling party. Second was the combining of non-traditional platforms such as social media with the old fashion way of logging miles. Third was the strategy of tarring rivals. The question at hindsight is if political parties drew lessons from companies’ marketing tactics or is there a lesson for Corporate India in the way the war rooms were analyzing ground-level feedback and organizing logistics for an intricate schedule of rallies across the country? Many inferences can be drawn from the successful culmination of Narendra Modi’s journey to prime minister. First, a product’s local fame can be leveraged nationally with good marketing. Amul has become a pan India brand from being a Made-in-Gujarat variety due to its superior distribution network. However, mass selling should not diffuse product differentiation. This is the second lesson. In a country where politicians prefer the easy way of emotive appeal of religion and caste, Modi propagated development to stand apart. This approach works if it is backed by user experience. Reports suggest that the Modi wave in north India was not just a by-product of hype but also the result of testimonials of migrants from this region about the opportunities and uninterrupted power supply in Gujarat.
Actions, rather than words, reinforce an image is the third lesson. In their bid to blunt Modi’s talked-about administrative acumen, opponents used comparative advertising to show that other states were better on some social indicators. Indirectly, the debate ensured that the Gujarat model remained in the news. For the young voters hungry for jobs, the uniqueness was that Modi welcomed business investment. The contrast became stark against the backdrop of huge projects getting stuck for want of environmental clearances even as the UPA government was spending on giveaways. Modi demonstrated decisiveness when he quickly seized the opportunity presented by the agitating farmers of Singur, West Bengal, by welcoming Tatas’ Nano project. On the other hand, Rahul Gandhi’s pro-tribal stand on the troubled Posco mining project in Orissa strengthened the perception that he preferred populist posturing. While assigning valuations to stocks, the market, too, takes into account management credibility. Infrastructure companies are viewed with caution due to their dependence on government contracts. Technology and pharma companies get better discounting as they cater to the fussy developed markets. Similarly, a stock showing a sudden spurt in prices raises suspicion. While Modi’s more than 10-year track record as chief minister of Gujarat could be examined and debated, Rahul was thrust as a fresh face that the country should rely on. The hitch was that the electorate viewed him as part of the problem rather than the solution. After his criticism resulted in the withdrawal of the ordinance that would have allowed convicted politicians to contest polls, he could no longer position himself as an outsider. Voters read his inaction for most of the decade-long UPA rule either as indifference to the policy paralysis or as covert support to various ministers’ acts of omission and commission. The fourth lesson, therefore, is that consumers are open to experiment with innovations but not those merely packaged as new.
The message has to be tailored to the market. When HUL was blindsided by low-end Nirma washing powder, the leader in the premium segment hit back with its own cheaper brands. Similarly, the FMCG sector’s experiment with sachets for the small and rural users has turned out be a roaring success. Starting off with the development agenda in urban and semi-urban areas in the first half of the long election schedule, Modi switched track to his humble beginning as a tea seller. The fifth lesson is widely practised in the consumer durables segment. Automobile manufacturers produce a range of vehicles for the premium segment and the common man. The last lesson is that running down competitors should be based on facts that are not open to any other interpretation. Harping on Modi’s largesse of giving land cheaply to the Adani group did not resonate among educated urban voters who knew that the price of an immovable asset depends on its location. So the alleged setback to the exchequer on this account was not comparable with the revenue loss suffered due to selling telecom spectrum and coal blocks to cronies at throwaway prices. In fact, Rahul’s attempt to provoke outrage boomeranged as it triggered association with his brother-in-law’s dealings in real estate. In the end, it is sometimes better to sacrifice the pawns rather than expose the Queen by rash moves.
Wednesday, May 21, 2014
Monsoon blues
The El Nino impact on southwest rains could complicate efforts to put the economy back on fast track
By Mohan Sule
After reaching a new closing high on 23 April, the market lost over a quarter of the 8% gain notched in the current calendar year in the next five trading sessions following an alert about the El Nino effect on southwest monsoon. Historical evidence suggests that below-average rainfall is losing its potency to dent growth, though it does affect agriculture output. A year after the global financial meltdown in September 2008, the economy grew 8.6% despite receiving just 78% of normal rainfall. FY 2010 was officially declared as a drought year. Two years later, the GDP rose just 6.7% even after 101% of normal rainfall. FY 2014 saw 106% of normal rains. Yet, output is expected to slump below 5%. Besides, the Indian Met has been off the mark about its forecast. Only in FY 2011 has the actual rainfall matched the predictions made since FY 2001. In a normal year, the warning would have caused a blip for a day or two, before the market returning to its preoccupation with inflows from foreign investors. 2014, however, is no ordinary year. Besides uncertainty about the formation of a stable Union government, withdrawal of stimulus in instalments by the US Federal Reserve since December 2013 and the slowdown in China are overhangs. Concerns that a coalition government will have less flexibility to carry out reforms have already led to foreign capital outflow. Foreign institutional investors were net sellers of debt in April, perhaps worried about the inability of the Reserve Bank of India to lower interest rates, and slowed down purchases of equity after their buying reached the highest level in March of this calendar year.
The immediate concern about scanty rainfall is the pressure on food prices. Food items have been the biggest contributor to the Consumer Price Index despite good rainfall in seven of the past 10 years. Slump in demand has stalled manufacturing growth. But consumption of food continues to be buoyant as the population coming out of poverty due to reforms and welfare schemes is increasing. Shortages, therefore, could lead to a spike in food inflation and nix the chances of the RBI beginning its interest rate reduction cycle soon. Cut in household expenses could affect discretionary usage. In fact, India is caught in a paradoxical situation. Both above average and less-than-normal rainfall bolster food prices. The government hikes prices of farm output to lend support during bumper production and to compensate for the fall in harvest during drought. Hence, consumers end up paying more year after year. Indication of scarcity of any agricultural produce leads to spurt in international prices. This is what happened when India wanted to import sugar for the October 2009-Sepetmebr 2010 season after the failure of sugarcane crop. Global sugar prices shot up more than 60% from end 2008 till August 2009. A glut in Indian production, on the other hand, saw a worldwide slump in global sugar prices and duty on sugar imports had to be raised to 15% in October 2013 from 10%.
What can be done? The economy could expand in FY 2010 despite drought due to fiscal stimulus of the earlier year. Standard excise on non-petroleum products was reduced to 8% from 14% to insulate India from the worldwide credit crunch. As a result, fiscal deficit ballooned to 6% of GDP in FY 2009 from 2.5% in the previous year. In contrast, GDP could grow just 3.8% in FY 2003, another drought year, with rainfall 81% below normal, in the absence of booster doses. These sops have not been rolled back fully. Excise duty remains at 12% now. The interim budget presented in February 2014 introduced more relief for automobiles. Any more reduction in domestic levies will have to be at the expense of personal and corporate taxes. Nonetheless, any stimulus would be a short-term measure. In the medium term, infrastructure proposals need to be given clearances quickly and irrigation and low-cost housing projects have to be initiated to increase offtake of commodities such as cement, aluminum and steel and to revive the manufacturing sector. The budget for 2012-13 had proposed setting up a financial holding company for PSU banks to meet their capital needs. The idea should be extended to other PSUs, too. The holding company could offer a mix of PSU shares to get better pricing instead of seeing the stock of a standalone entity poised to enter the market getting hammered. The CPSE exchange traded fund, comprising shares of 10 PSUs constituting the CPSE index, launched in March 2014 has met with good response and should embolden the government to undertake aggressive offloading of its shares to boost the market as well as to mop up funds for growth activities.
By Mohan Sule
After reaching a new closing high on 23 April, the market lost over a quarter of the 8% gain notched in the current calendar year in the next five trading sessions following an alert about the El Nino effect on southwest monsoon. Historical evidence suggests that below-average rainfall is losing its potency to dent growth, though it does affect agriculture output. A year after the global financial meltdown in September 2008, the economy grew 8.6% despite receiving just 78% of normal rainfall. FY 2010 was officially declared as a drought year. Two years later, the GDP rose just 6.7% even after 101% of normal rainfall. FY 2014 saw 106% of normal rains. Yet, output is expected to slump below 5%. Besides, the Indian Met has been off the mark about its forecast. Only in FY 2011 has the actual rainfall matched the predictions made since FY 2001. In a normal year, the warning would have caused a blip for a day or two, before the market returning to its preoccupation with inflows from foreign investors. 2014, however, is no ordinary year. Besides uncertainty about the formation of a stable Union government, withdrawal of stimulus in instalments by the US Federal Reserve since December 2013 and the slowdown in China are overhangs. Concerns that a coalition government will have less flexibility to carry out reforms have already led to foreign capital outflow. Foreign institutional investors were net sellers of debt in April, perhaps worried about the inability of the Reserve Bank of India to lower interest rates, and slowed down purchases of equity after their buying reached the highest level in March of this calendar year.
The immediate concern about scanty rainfall is the pressure on food prices. Food items have been the biggest contributor to the Consumer Price Index despite good rainfall in seven of the past 10 years. Slump in demand has stalled manufacturing growth. But consumption of food continues to be buoyant as the population coming out of poverty due to reforms and welfare schemes is increasing. Shortages, therefore, could lead to a spike in food inflation and nix the chances of the RBI beginning its interest rate reduction cycle soon. Cut in household expenses could affect discretionary usage. In fact, India is caught in a paradoxical situation. Both above average and less-than-normal rainfall bolster food prices. The government hikes prices of farm output to lend support during bumper production and to compensate for the fall in harvest during drought. Hence, consumers end up paying more year after year. Indication of scarcity of any agricultural produce leads to spurt in international prices. This is what happened when India wanted to import sugar for the October 2009-Sepetmebr 2010 season after the failure of sugarcane crop. Global sugar prices shot up more than 60% from end 2008 till August 2009. A glut in Indian production, on the other hand, saw a worldwide slump in global sugar prices and duty on sugar imports had to be raised to 15% in October 2013 from 10%.
What can be done? The economy could expand in FY 2010 despite drought due to fiscal stimulus of the earlier year. Standard excise on non-petroleum products was reduced to 8% from 14% to insulate India from the worldwide credit crunch. As a result, fiscal deficit ballooned to 6% of GDP in FY 2009 from 2.5% in the previous year. In contrast, GDP could grow just 3.8% in FY 2003, another drought year, with rainfall 81% below normal, in the absence of booster doses. These sops have not been rolled back fully. Excise duty remains at 12% now. The interim budget presented in February 2014 introduced more relief for automobiles. Any more reduction in domestic levies will have to be at the expense of personal and corporate taxes. Nonetheless, any stimulus would be a short-term measure. In the medium term, infrastructure proposals need to be given clearances quickly and irrigation and low-cost housing projects have to be initiated to increase offtake of commodities such as cement, aluminum and steel and to revive the manufacturing sector. The budget for 2012-13 had proposed setting up a financial holding company for PSU banks to meet their capital needs. The idea should be extended to other PSUs, too. The holding company could offer a mix of PSU shares to get better pricing instead of seeing the stock of a standalone entity poised to enter the market getting hammered. The CPSE exchange traded fund, comprising shares of 10 PSUs constituting the CPSE index, launched in March 2014 has met with good response and should embolden the government to undertake aggressive offloading of its shares to boost the market as well as to mop up funds for growth activities.
Subscribe to:
Posts (Atom)