Archive for October, 2009

First, wish y'all a great Diwali and a fabulous year ahead.

Last year, I posted on Diwali about the year ahead. And I was largely wrong. The index has reached a one year high, with a near 96%: it was definitely worthwhile to have invested in the index. The real estate market hasn't crashed - apart from a few smaller towns. Mumbai and Delhi are rocking. India didn't go into a recession in terms of negative GDP growth. The dollar is at 45, a little bit below 50 but it stayed at 50 for most of the year. I have not yet lost any meaningful amounts of weight.

Some of it might look like it came true - interest rates did fall, equities did look good sometime in the year, and some individual stocks gave their 100-200%. Pension funds did move in. Sure, some job losses happened. But this is all small stuff - I won't sweat it and easily say I got it wrong.

But I'm not going to stop trying, because you never know what you do that makes you win a Nobel prize nowadays. So here's the market stuff for next year.

• Chinese real estate markets are going to tank. Sometime in the middle of 2010 perhaps, and coincide with a number of ARM resets in the US. This will somehow reveal why India and a lot of other countries are impacted by this, though no one has a clue just yet. I wish I could be specific, but I'm no soothsayer.
• India's going to have a real estate boom/bust cycle yet again. This is likely to be a really short one, largely because the last one didn't get over properly. This time it'll be the investors that hurt as much as the random retail buyer.
• But commercial RE? That will take a hit all over India. We'll finally see some real estate moves into smaller towns, and the bigger towns will take a hit.
• Oil prices will slowly ease back after showing spiky behaviour. Some of this will be related to demand loosening, and yet others to regulation that disallows speculation in commodities.
• Gold will continue to hit all time highs; there is likely to be a 10-20% drop in the year though, but it will roll back up.
• Equities will see a lot of interest from organized funds like pensions, insurance and other long term saving schemes. That will provide a floor around the 3000 levels on the Nifty. We won't see a new all time high in the broad indices (I'm going out on a limb on this one) and we will see a 30%+ drop in the year.
• I will, as usual, attempt to do something more constructive in my life in terms of building a future for myself, giving more time to family, teaching my son to say "left" and "right" (instead of "yeft" and "yight" right now) and other items of similar importance, learning to write, taking a good long break, and finally, losing weight.

If nothing but the last one comes true, I will consider it a great year. Money is for living, not the other way around. Happy investing in the next year, folks.

RBI Governor Subbarao speak with a lot of unanswered questions, in Istanbul. ("Emerging Market Concerns: An Indian Perspective")

From the perspective of Emerging Market Economies (EMEs) and particularly for that of India, I will highlight five concerns. These are: first, timing of exit from the accommodative monetary policy in the context of rising food price-led inflation but still weak growth; second, the possibility of another surge in capital flows, especially if we turn out to be an outlier in withdrawal of monetary stimulus; third, monetary transmission mechanism as it is evolving from the crisis period; fourth, return to fiscal consolidation and quality of fiscal adjustment; and finally, the implications of the efforts towards financial stability on financial inclusion and growth.

...

Although inflation pressures emanating from higher food prices may limit the scope for monetary policy action, there are implications for inflation expectations. Furthermore, unlike the major advanced economies, growth remains positive. Real GDP growth was 6.7 per cent in 2008-09 and is expected to be 6.0 per cent (with an upward bias) as per the Reserve Bank’s July 2009 projections. In view of the country specific features, we may need to exit from accommodative monetary policy earlier than advanced economies. This calls for careful management of trade-offs: growth concerns warrant a delayed exit, but inflation concerns call for an earlier exit. An early exit on inflation concerns runs the risk of derailing the fragile growth, while a delayed exit may engender inflation expectations.

He says Inflation is high on the CPI front, we have a current account deficit of 2.6%, and we're a consumption based economy (private consumption is 55% of GDP).

Major central banks – such as the US Fed, the ECB, the BoE – have flushed their financial systems with unprecedented amount of liquidity. Till the first quarter of 2009, this liquidity was finding its way back to the central banks as excess reserves because of risk aversion.

Risk appetite is now returning. There are signs of recovery in portfolio investments to the EMEs. For instance, portfolio investments by FIIs in the Indian equity market amounted to US$ 13.6 billion in the period April 1-September 18, 2009 as against outflows of US$ 5.2 billion in the corresponding period of 2008 reflecting a turnaround of almost US$ 19 billion.

Moreover, as noted above, in view of incipient inflationary pressures, policy rates in our case may have to be tightened ahead of those in advanced economies. The resultant larger interest differential may attract larger capital inflows. Will capital inflows be modest or turn into a flood as in 2007? The latter concern is particularly relevant in view of abundant liquidity in the major advanced economies. What will the implications be for exchange rates? In India, the current account is in modest deficit; hence large and volatile capital flows can impose macroeconomic costs.

This is where I disagree. Increase in policy rates isn't going to increase portfolio flows - that is so pre-financial-crisis thinking. First, look at the situation - banks haven't cut their deposit rates much, and neither have public saving schemes. FII investments in government bonds have a stupidly silly cap. Still, the money went out, even with corporate bonds offering juicy 10-12% yields.

Second, the last time we had a capital inflow flood, we had low, not high rates. That was 2007; and the liquidity flow that happened then is literally being copied today as we speak - if we have to worry about the flood of capital inflow, that time is now, not after we increase rates. (The Rupee has appreciated to Rs. 46.4 to the dollar - a 5% rise - in the last week or so).

And finally, if we bump up rates, we will eventually stymie growth. We have a crappy non-transparent Corporate bond market. We have foreign investment limits in the only really transparent bond market - government bonds that is. When that is the case, you won't get risk-averse inflows. But the risk capital, the biggest constituent of the "capital inflow" flood we have already received, Mr. RBI, will flow out because your rate increases will slow things down.

Emerging market central banks have three options in managing capital flows. The first option is for the central bank not to intervene in the forex market and let the exchange rate bear the burden of adjustment. Will undue exchange rate appreciation not further widen the current account and what will the implications be for future sustainability? Will exchange rate appreciation help to contain inflation? These are the questions to address if this option is adopted.

Second, the central bank can intervene in the forex market, but refrain from sterilisation. Such an approach runs the risk of excessive growth in monetary and credit aggregates which can lead to higher inflation as well as credit and investment booms and create financial fragility.

The third option is to sterilise the interventions. Irrespective of the method of sterilisation, the financial cost of sterilisation in terms of national balance sheet is obviously ultimately borne by the government even though direct costs may be borne by separate agencies. Sterilised intervention can exacerbate fiscal pressures, but this needs to be assessed against the benefits of macro-financial stability.

For those of you who find this difficult - option 1: let the rupee appreciate, that will reduce inflation (because commodities are linked to the dollar), but it hurts our exports and thus causes current account deficits to widen. Option 2: Hold the rupee down, but that will involve printing hajaar rupees to buy dollars. That will cause inflation and madness. Option 3: Hold rupee down and then use sterilization measures like selling bonds to keep the rupees from flooding the system. We did this once, and it doesn't seem to help.

I would go with Option 1 - and not just because I want to spend lesser rupees on buying that Amazon Kindle. It's fairer - we are a consumption economy, so let the rupee grow, we'll eventually start using the dollars to import hajaar stuff and it'll be more well balanced. But I think the RBI will go with 3 - a very short sighted measure.

The other thing Subbarao notes is that the RBI has limited means to make monetary policy flow in this direction (i.e. reducing rates). That I think doesn't apply on the other side - one whiff of RBI increasing rates and all the PLRs, BPLRs and other lending rates will go up immediately.

It needs to be recognized that after a crisis, with the benefit of hindsight, all conservative policies appear justified. But excessive conservatism in order to be prepared to ride out a potential crisis could thwart growth and financial innovation. The question is what price are we willing to pay, in other words, what potential benefits are we willing to give up, in order to prevent a black swan event? Experience shows that managing this challenge, that is to determine how much to tighten and when, is more a question of good judgement rather than analytical skill. This judgement skill is the one that central banks, especially in developing countries such as India, need to hone as they simultaneously pursue the objectives of growth and financial stability.

Say what you will, this was an incredibly well written speech. And while Subbarao doesn't yet answer his questions - maybe because it defeats the purpose to say it before he does it - he brings across the context beautifully.

There's still zany asset price bubbles to deal with, though. Look at stocks and real estate. In that perspective, we are still a diseased economy on steroids. It feels great, but if we don't slow down and rest a bit, we'll be worse when the steroids stop. And it doesn't matter that the world is on heavier steroids.

ET: Direct tax kitty grows 3.69%

The Centre has collected 3.10 per cent more in direct taxes in September at Rs 64,737 compared to the same period last year.

With this, the mop-up from direct taxes for the first half of the fiscal has touched Rs 1,52,625 crore, an increase of 3.69 per cent over the corresponding period a year ago.

The growth in government's corporate tax kitty for the fist half of this fiscal was more pronounced at 5.55 per cent over last year's. In the first six months, Rs 1,00,572 was collected in corporate taxes compared to Rs 95,283 crore last year, the Central Board of Direct taxes in a statement

However, Personal Income Tax collection for the first half at Rs 51,897 crore saw only a marginal rise of 0.38 per cent over last fiscal. The figures include Securities Transaction Tax and residual Fringe Benefit Tax and Banking Cash Transaction Tax.

Isn't 3.7% growth in tax collections slightly low for an economy that's supposed to grow at 8%? Agri growth won't be great, what with the drought and all, so corporates should make up, one thinks.

A government dictat, or the threat of it, does not rile me much anymore; especially when the Congress government rules. Oh well, any government, but they've had the biggest chunk of time in power. Still, once in a while, their spokespersons make statements that are simply intolerable because they reek of double standards.

Salman Khursheed is our Minister of State for Corporate Affairs. (which, incidentally, does not involve snooping into whether Bharti went to bed with Vodafone, though that might be a better use of his time). He went on the rampage against "vulgar" salaries being paid by the private sector to their CEOs, saying that he could "hardly shut his eyes on what salary CEOs are going to take". We can be liberal, he said, but not vulgar, referring perhaps to the fact that some people other than politicians have actually made some money and worked hard, which must be anathema to the Congress Party.

This stinks. The government spends an obscene amount of money in Delhi just propping up people like Khursheed. He stays, supposedly, at 2, Motilal Nehru Place,New Delhi-110011 which is in the heart of Lutyen's Delhi. That house is probably worth 50 crores now, but let's just take the rental value - about Rs. 10 lakhs per month? Why not give it up, and go live in a house in Delhi that he OWNS, if he wants to be austere? Why foist his austerity on us, when it was his government's stupid policy of forgiving farmer loans, overpaying fertilizer subsidies and running obscene oil subsidy bills?

That 10 lakhs a month adds up to a fair bit, one would think, for a person whose primary role seems to be to keep making silly statements. But it doesn't end there. We, the tax payers, pay for their servants, their transport, their security, their phone bills and of course the few crores they spend when they scream and rant and adjourn parliament because they want to do su-su.

Choices: a) we spend our money, or b) they spend our money. That decision, to me, is very easy.

Khursheed warns against being ostentatious. Oh yes, having FOUR cars is not very austentatious; his wife and him own a Scorpio, a Gypsy, a Jeep and an Innova. He owns a flat in Delhi and 11 acres in Farrukhabad, UP. Khursheed's has declared 75 lakhs in FDs in only his name. And this is just the declared assets; which we must believe is all he has, otherwise we are vulgar.

CEO pay has been debated in a lot of countries; the latest is to limit bonuses and make them more in line with real profits (not ones invented out of thin air). That is perfectly understandable. But to limit salaries in what is a real profit making enterprise is overreaching and unnecessary; after all such salaries involve payment of tax to the government (rather than keeping them in a zero-tax SEZ or something), and then the money is spent so the money trickles down to those who don't have it.

When a company like Reliance, which makes a NET profit of over 15,000 cr. per annum, pays its CEO a salary, including perks, of Rs. 44 cr. , it is hardly "vulgar". But to understand that will require the application of logic, and I must beat myself with a stick for expecting too much of our politicians.

I say spend it. We've saved way too much. They're going to debase our currency anyway through inflation. Setting limits on CEO salaries is going to be a waste of time - they will find a way around it anyhow. Better, perhaps, to ask them to spend as much and more; some of that money will find its way to the poor, and some of it, FSM forbid, into government coffers as well.

Too much ranting. Sorry.