Don't Burn Down The House

Don’t Burn Down The House

The Non- Resident Indian ( NRI), and the PIO ( person of Indian origin, meaning holding another country’s nationality now, but ethnically an Indian, or even married to an Indian passport holder), is probably feeling good about his hard currency fetching him more rupees every passing day.

Reports suggest that they are looking at investing in flats and bungalows in the seven metro cities leveraging their windfall exchange rate gains. They are also paying off loans with the arbitrage opportunity on the currency. And why not; there is never an evil wind that doesn’t blow some people some good.

The inward remittances from the Indian diaspora are accelerating with the rupee weakness. It stood at $ 69.35 billion in 2012 as compared to only $ 46.84 billion by way of the vaunted FDI per 2011-12 figures.

Inward remittances have been a bulwark for the Indian economy for long. Money in from NRI’s and PIO’s accounts for some 4% of Indian GDP. This is largely unsung, while the much sought after FDI is almost half of that!

 And such remittances are expected to grow by anywhere between 15%, already up in the first six months of this fiscal, to 25% for 2013, over the record 2012 figures.

Other beneficiaries of the currency crumbling and runaway inflation include all current owners of Indian real estate. They bought in, fortuitously, when the prices were lower and the rupee was stronger. They have ergo kept pace since then with all the rampant inflation as far as their homes and commercial properties go.

This is the good thing about the reality of real estate in India. It only plateaus or goes up in price, never down, and all of it is built in brick and stone designed to last for a minimum of 30 years. This is quite unlike the flimsy prefabs and inflammable lumber that most American homes are made of, except for the old historical “brownstones” etc. built before modern materials kicked in.

Europe has more solid homes, if smaller, as we understand them, but Americana has affected a lot of the newbie construction there too.

Prices of Indian property held fast may have doubled or trebled in the last five years and even indexed for inflation, has given owners some 20% per annum on their investment. This even as they have lived in it or rented it or held it closed up for a rainy day.  

In Mumbai, this has done even better because the premium location supply is extremely restricted, you could call it the scarcity premium. There is no scope for new product to come on the market in South Mumbai for example, except by way of redevelopment. This applies pretty much to all the metros, now considered to be seven in number, but to a lesser extent.

Property therefore can be the mute saviour in these uncertain times for many in the middle and upper classes.  We need to understand this and reprioritise our understanding of our security and savings.

Elvis Presley’s cover of Carl Perkins’ Blue Suede Shoes was a massive hit in its time.  So much so that fifty, sixty years on, most rock n roll fans still knows the song. It has some curious lyrics which attempt to underline the importance of those shoes by suggesting that any antagonist is free to “burn the house/ steal the car/ drink my liquor from an old fruit jar/” just as long as the blue suede shoes are left unharmed.

High-brow magazines such as The New Yorker have tried to make sense and significance of it, the lyrics, particularly about the obsession with the shoes, or perhaps its metaphorical stand-in. But most listeners understand the sentiment in their own way without any difficulty.

In the Indian context, particularly now, we can’t possibly worry about the shoes. We must not however compromise the safety of the house. Our future may depend on it. It will keep pace with the fuel price rises, the knock-on effect on all prices, and the depleting foreign exchange reserves and every other kind of bad economic news. Nothing else can do this.

Having said that, and now that Socialism does not hold the sway it once did, the concept of “unearned income”, with its built-in pejorative, is largely replaced by the concept of “capital gains”, a far more comfortable and respectable thing to be involved in seeking.

And with maximum rates of taxation moderated in deference to the persuasiveness of the Laffer Curve towards overall tax compliance; as well as indexed benefits for long-term capital gains, this is probably the surest bet in the country.

Long- term for property is currently defined as a holding period of three fiscal years from taking official possession of it. This could change after the new Direct Tax Code is implemented but there are many points of it being debated as of now.

Also consider that we have done away with death or estate duties completely, and wealth tax is largely ineffective, and even in the direct tax code in the works, it is much more realistic in terms of its threshold limits. Applicability for Wealth Tax will kick in after property is assessed for over 30 to 50 crores.

In most families there are of course several hands, and therefore several property owners potentially. Particularly, for what the Income Tax authorities call “self-acquired” property as opposed to the inherited piles.

Attempts to discipline builders via the new Realty Bill in the works will also push up prices if implemented.

The NRI therefore has a window of opportunity only if it is seized quickly. Otherwise the inexorable price rise will squeeze out potential buyers. New projects will be fewer and farther apart. And there will be a lot of people forced to rent as buying will be too far a stretch. But rents too are set to rise as the current ones are tending towards a fraction of the rising property values.

Redevelopment of old properties to take advantage of increased Floor Area Ratios and current finishing materials and design will prove extremely lucrative. It is the only way to turn locational advantage into a bonanza.

And all of this in a place and time when all the rest of the economy is crashing or in the doldrums. This may, of course put a dampener on transactions, but only till people realise it is the one sure shot in an uncertain business environment.

(1,074 words)

June 29^th, 2013

Gautam Mukherjee

Hell Happens

Hell Happens

“Hell happens when the evil of the world exceeds our belief that we can conquer it”, says an actor,  Tom Riley, playing a young Leonardo Da Vinci, the quintessential inventive genius and renaissance man, in a current British-American TV serial production called  “Da Vinci’s Demons”. He says this, not for the first time either, in Episode 6, of Season 1.

The pronouncement has a majesty about it, the phrase, that is reminiscent of the great Indian epics, The Ramayana and The Mahabharata, particularly the latter. It suggests inexorable wheels set in motion that are the stuff of immutable fate itself.

And today’s crumbling economic scenario, reaping the whirlwind of inaction, is leading to a crisis of confidence in our present and future ability to cope with it. There are structural and policy problems preventing solutions. Socialism is the God that failed and yet is allowed to be in the way.

The inaction and the ignoring disregard of the classic economic principles where you cannot but attempt to balance budgets and work to create surpluses and reserves is the problem. You cannot let deficits finance unproductive endeavours and rank consumption without destroying the vitals of the economy.  And cheap borrowed money growth applied to excess of every kind as in the West has to result in a most painful bust. And it has.

But fact is, on the strength of a couple of trillion dollars’ worth of economy, all told black and white included, you cannot provoke ruin time and again, with unheeding profligacy, free lunches and populism. We are catering to over 1.2 billion people after all, and there is not enough depth to this economy to endure crisis for very long.

And you cannot keep expanding the size of a wasteful, under productive and corrupt government without it catching up to you someday.

It is this that destroyed our one time mentors and gurus in the Soviet Union as soon as glasnost and perestroika replaced the jack boots of repression . And it is going to destroy us as completely unless we course correct as soon as the new Government, an NDA Government, with its right- of- centre ideas, is elected.

This kind of prosperity making policy might make sense to a Narendra Modi and his developmental economics, but does nothing to enthuse either the Congress Party with its Leftist roots, nor its supporters in the UPA ,which included, till lately the TMC, which has Maoist supporters further to the Left than the CPM  Ms. Mamata Banerjee ousted.

Then there is the Left itself, long allied to the Congress Party from Mrs Indira Gandhi ’s times,  till Mr. Prakash Karat fell out with Manmohan Singh in UPA I   over the Indo-US Nuclear Power Deal and our coming out of pariah status as a de facto nuclear power.

The DMK and the AIDMK are also populist. So are most of the other regional parties in different states.  Mulayam and Akhilesh  Singh’s  SP  is Lohiaite, a form of rebellious Socialism, with some attitude towards the Congress Party. The rival BSP in vitally important Uttar Pradesh is also Socialist, with a crusading mentality in favour of Dalits.

The RJD in Bihar is Congress- allied Socialist and now the JD (U) too. The remaining constituents of the NDA in Punjab, the  Shiromani Akali Dal and the Shiv Sena in Maharashtra are probably the only right- of- center parties there are in India today, apart from the BJP itself.

This country is suffering every kind of economic crisis today. Exports are struggling, industry is stagnating, the service sector and IT are struggling. There are no new jobs. Wages are frozen. Redundancies and closures are increasing. Crime is climbing. Law and Order is under pressure. The Government is more corrupt than it had ever been. Internal insurgencies are more strident. External sponsored terrorism is running riot. Parliament and State Assemblies are in a state of non-functionality. The currency is losing value every day. All macro- economic parameters are flashing the red lights of danger. The banks are nearly bankrupt. The stock market is reeling. Real Estate is marking time.

And at the root of it all is an unsustainable Socialism gone on for much too long, that is proving too rich for our blood. It is just as it was before the USSR was thrown into the dustbin of history.

The helicopter shot, the aerial survey of our economy in June 2013, shows most of the polity gathered around dead and dying Socialist strategies; with tired populist arguments that have been discredited again and again and let people down with empty promises.

And off to the other side, is Mr. Narendra Modi’s bold new vision for the BJP, supported by the rump of the NDA and the RSS and allied organisations, saying everything can be set right if we take the path of fiscal responsibility and productivity. This is a country with enormous unrealised potential. This needs to be unleashed. If this is done country-wide, it will make us prosperous. Inclusiveness cannot mean misery loves company and let us beggar everyone per the Socialist prescription.

Mr. Nitish Kumar is glorying in poverty. Mr. Rahul Gandhi likes to slum it in between his elitist lifestyle. The Government of India operates with a wastefulness that makes the diplomatic community from the developed countries gasp.

The NDA will gather most of its allies post the election when it emerges as the single largest party. But all of them need to focus their attention on rejigging their economic policies towards productivity and growth as well.

  

(927 words)

June 27^th, 2013

Gautam Mukherjee

Resist Time-Warp Politics

Resist Time- Warp Politics

We find ourselves in an Indian political world of a quarter of a century ago. Some of the old players  are here still on stage, denying their vision of the past. Other new ones, are curiously mouthing old lines, thrust through a crack into a time-warp, a rewind.

We are being consumed by reactiveness and drift that is increasingly reminiscent of the late 1980s before the reforms began in 1991. Reforms begun under this very same Prime Minister, but then Finance Minister, following orders then- as he is now.

And the old hyphenation between India and Pakistan has just been put back on the table by visiting US Secretary of State John Kerry. There is no one here in the MEA or the PMO who is indignant about this. There is not an official word on it.  We have shrunk.

We seem to have no will to defend our interests. We choose to ignore insults and slurs. We have become good at tunnel vision, seeing only what we want to see.

We see ourselves with a role in Afghanistan. One that Kerry finger- waggingly told us to assume. That it is on par with a Taliban backed by Pakistan and the US, conveniently escapes us.

We are to do their bidding for our own sake, as a Talibanised, armed, Pakistan and America backed Afghanistan, is on our doorstep geographically, and not on America’s. But, as we and they have seen, terrorism cannot be so neatly contained, even as America seeks to disown the problems in Afghanistan now.

It is as if the intervening years of growth and pride since 1991 for India have disappeared down one of Alice’s rabbit holes.  The Government is playing garibi hatao in new bottles with occasional forays towards roti, kapda aur makaan as well.  It has the same disdain for good economics that Mrs. Indira Gandhi and Mr. Jawaharlal Nehru had.  Rajesh Khanna is smiling down on us through the time-warp reminded of his superstar days which go back even further. He might just send for his haathis and join the fray.

But surely, there is a thread of rationality, groundedness, that is in the here and now, in the present, in 2013, with some people uninfected by this general fantastical  malaise?

Mr. Narendra Modi does not sound like he’s from yesterday, despite the fading chorus shouting Godhra, Godhra 2002, or Ishrat Jahan, despite her proven LeT links, every time he speaks. He is demonstrating faith in the future, even as he links his vision with that of Dr. Shyama Prasad Mookerjee, who did not want Kashmir to have a special status under Article 370.

Modi links with the glory days of Mr. Atal Behari Vajpayee, our former Prime Minister, who saw his way to make great progress for the country, inclusive progress, despite the compulsions of a large and unwieldy coalition.

Narendra Modi, BJP’s prime- ministerial aspirant, goes to Uttarakhand and does something to help and console. He helps evacuate 15,000 Gujaratis because he is Chief Minister of Gujarat. There is a chorus of protest at his presumption.

Rahul Gandhi, The UPA’s heir apparent, is missing; he’s gone to Spain, away from the rain. He has a knack for leaving when it gets tough. He’s done it many times before, and no doubt will do the same in future.

Home Minister Shinde, abjectly partisan in his approach, tries to prevent Modi doing an aerial survey over the Char Dham Yatris in Uttarakhand. It was, of course, OK with him when Mr. Manmohan Singh and Mrs. Sonia Gandhi did it. Of course after they went in, the Army and the Air Force was pressed into service and large monies were promised towards disaster relief and rebuilding. Credit where credit is due.

The media kept asking who is responsible for the unpreparedness and the damage. It is still asking. Many people have died. The international press has largely ignored Uttarakhand. No other country has offered money, expertise or materials to help us. The world is tending more and more to ignore India just as it did in the 1980s.

Britain has indicated “high risk” visa restrictions for Indian visitors that will involve a deposit of Pounds 3,000/- or about Rs. 2.7 lakhs. A pilot project will be launched in November 2013. The Indian Government has not responded to this insult either.

Mr. Modi is staying away from Ayodhya for now much to the chagrin of the Government. He is sticking to his development script.  Mr. Nitish Kumar is sneering at him and sidling up to the Congress Party, which is making the right sounds but weighing its options. Mr. Kumar has chosen sides but he could well fall between stools come 2014. His is an opportunism without any great promise of opportunity.

Tomorrow is crying out for a new script. Mr. Modi believes he has one and most of his party and the RSS believe he does too and is backing him . The Congress Party is not sure if tomorrow deserves something new or something old.  They have been running a system of diarchy which is coming apart at the seams, and yet, if there is another UPA formed after the elections, the dual centres of power will certainly continue.

Except this time there may be a more pronounced three, or even four centres of power, namely the nominated PM, the Party President, the Party Vice President and possibly his sister/brother-in-law as well in some role found for them.

The regional parties could not care less about ideology but they would like a stab at the power either via a third or “federal” front or through the coalition that will be formed either by the BJP  or the Congress Party.

Mr. Modi may well get the BJP a larger tally because he has chosen to clearly speak his mind on various issues well in time for the electorate to consider. The population is looking for deliverance. The BJP itself is shedding baggage. The central satraps, most of the ones who have a future in the BJP have chosen sides. 

The ageing old guard does not have much scope to make trouble or at least benefit from it. The successful Chief Ministers from the BJP are willing to do their bit to help get elected at the centre. Bihar and Uttar Pradesh will prove crucial to the numbers.

The combination of aspiration on the part of the voter and clarity on the part of Chief Election Strategist of the BJP Mr. Modi, could well see the NDA back in power in South Block.

(1,097 words)

June 24^th, 2013

Gautam Mukherjee

The Perfect Crime

The Perfect Crime

The perfect crime said Nicolo Machiavelli, the Renaissance political theorist, is one without a suspect. In the Indian context, this perfect crime masquerades as governance, or its travesty, depending on one’s bias, perception, comprehension and position.

The economic scenario is such that no one believes India anymore. There are no silver linings. We who live here are in despair, forever waiting for Godot. There is little or no international confidence in our Government’s pronouncements too.

Potential FDI and FII are openly laughing at us, most recently at the Finance Minister’s tired assurances, for talking much and implementing next to nothing. Global rating agencies are moving relentlessly towards downgrading our sovereign credit rating to junk status, convinced our deficits will balloon out of control now.

There are no takers for India’s Government bonds despite easing of norms for foreign investors. This is our Government’s borrowing programme, without which it cannot function, and it is in trouble. Even the collection of income tax arrears which run into tens of thousands of crores is reported to be dismal, a mere 2 or 3% of the outstanding! The NPA's (non-performing assets), in banks are at an all time high.

The sharp fuel price rises, particularly of the widely used diesel for transportation and agriculture/ back-up power generation, coming up very soon, due to a currency becoming more worthless every day, will spiral our deficits and inflation out of control.

The cost of our electricity will go up as we have begun to import coal with our weak and weaker currency to run our power stations.  The Indian coal is inadequate and of low quality. At the retail level, we will not only suffer even greater shortfalls of electricity as demand relentlessly outstrips supply, but have to generate our own with very expensive diesel.

There is no remedy to this crisis on every front because there is no will to rectify matters. There is no one effective on the command deck. This ship is in denial of reality and drifting on its own.

The perpetrators of the plight India finds itself in has no claimants, and certainly no one from the top most echelons of Government to the dregs, is owning any responsibility. It is an act of daily betrayal without a signature. It is a collective shirking of responsibility almost anonymous in its manifestation. The cumulative burden of which negligence and its consequences is the lot of the Indian people and the foreigners who live amongst us. Mr. Robert Vadra was more prophetic than he knew when he called the land ruled by his mother-in-law one of “mango people in a banana republic”.

It is we, the people, who must suffer the effects of our savings being eaten away by inflation and our incomes becoming more inadequate by the day. We, the people, have no power to extract tribute like our masters, full of themselves and their immunity from any accountability in real terms, not behaving at all as elected representatives are meant to.

We are helpless, always at position after the fact, at the receiving end, and will always necessarily be in this state of victimhood in a system meant to be representative democracy. But yes, the one net advantage available to us is our functioning democracy, our quite admirable election commission and process. With its universal franchise, and through this one right, we can change the water in our quest to restore the balance if we choose to do so.

But if even now we are cynical, and believe we are doomed no matter who rules us, we are indeed doomed, caught fast by our own self-fulfilling prophecy.

This kind of defeatist thinking subverts the very roots of democracy and undermines its foundations. We can make a change with our votes, and must do so with the intent of bettering our circumstances. We must believe there are politicians who can address our aspirations, and we must not cling to the crumbling status quo falling into the illusion of safety that has been betrayed times without number.  There is no status quo. We are under threat of destruction and dissolution.

And the more fractious we turn our democratic verdict, splitting our vote like a shattered mirror, that is just how we will reap the whirlwind. A government that is a bazaar of competing interests cannot govern. We have been through the experiment before with sad and unstable results in minority and Janata Dal governments. We will not be able to address our economic ills if we elect another one like the old ones that failed. Politics will dominate all else. There will be total gridlock.

But the Indian electorate has sometimes been wiser than anyone expected. This is another time when it needs to come to the rescue and restore the promise of the India story.

(790 words)

June 23rd, 2013

Gautam Mukherjee

How can we revive the rupee?

How Can We Revive The Rupee?

The most commonsensical   way, very rare on the ground though, to revive the plunging rupee, is to make India a vastly more attractive investment destination.

This means opening up many more sectors and areas to FDI on liberal terms. Of course this needs more than a policy framework or even changes notified and implemented, because despite the size of our market, most foreign investors are both disappointed and wary of our lagging reforms process.  There are smaller places with less red- tape and bigger yields for effort put in. India is a difficult country for foreigners to operate in.

Foreign direct investment is the best way to bring in the dollars that stay because they go into local enterprise. This is not borrowed money and has great potential to prove a win-win situation for all concerned. We have no time to lose in doing this, even as we are losing it most callously.

Of course, this is a medium to long term solution, and not very useful in the present crisis but worth stating anyway because it can go a long way to prevent future crises with regard to the value of our currency.

Our moribund UPA Government, solely focussed on the assembly and general elections coming up, is not going to do anything to encourage FDI now in the 10 months or so left. They would not be keen on benefitting the next Government, unlikely, from all opinion polls, to be themselves.

And so, the rupee will continue to slide unabated. The Government is currently hell bent instead to increase our exposure to vast welfare schemes including the Food Ordinance in the works. The idea is to seek votes on the back of it, and all the other welfare schemes operating, and never mind the economic impact on our fiscal deficit. If it puts the Congress Party in a position to head the next coalition after the general elections, their objective is realised.

Our balance of trade deficit presently is some $20 billion a month. Our CAD, or current account deficit, is caused by this balance of trade working against us. With China it is $ 40 billlion and rising and is almost half of the total CAD if one does not count oil imports. And it is steadily rising. This trade imbalance is at the root of rupee weakness structurally speaking.

Our productivity and infrastructure shortcomings are such that it is a wonder we are the world’s 10^th biggest economy in nominal GDP terms and the 3^rd in purchasing power parity terms even today.

But thank God for the remittances from Indians working abroad. Next to China, we have the biggest inward remittance scenario, and this steady inflow keeps us ticking over somehow despite our sorry export figures as well as low FII and FDI flows.

A strong export showing could have done quite a lot for the strength of the rupee. But for that we need thousands of quality items that the world wants to buy. We export very little and exports overall account for around 12% of the economy.

But that too is under threat due to the external environment in Europe, the US and indeed most of the developed world. And of course our lack of a strong export track record, for all that we do including commodities, value- added goods and services.  The IT area, software, BPO, and so on, is an exception, but is currently under pressure too because of the external environment. Ditto is the case with diamond import and re-export.

The Government could do a lot more by way of allowing large investment in public debt from the FIIs, but it shies away because of the security and sanctity implications. The RBI could intervene more to shore up the rupee even though it would be like King Canute trying to part the waves, but our dwindling reserves which were twice as large some time ago, can only finance about 7 months of imports now. The oil bill is building ever higher and the cheaper rupee, depreciated 10% in one month alone since May 2013, is certainly not helping.

The Government could work on stimulating domestic growth but has chosen to try and curb inflation instead, unsuccessfully, as it has persistently stayed around the 8% mark at the wholesale level and much higher at the retail points.

So not only is there a crisis but no clarity or agreement on what macro action to take in order to make things better. The sinking economy and the rupee alongside does not seem to be a priority. Every suggestion any outside observer can make therefore is largely theoretical in purport. There is no time frame to putting things right or attempting to. 

Reading between the lines, it seems the Government thinks the situation has been caused by the US Federal Reserve announcements on cutting back on its debt acquisition in the light of a perceived revival of the US economy alone. So it will pass, it thinks, and the rupee will gain in value as the time goes on.

(845 words)

June 21^st, 2013

Gautam Mukherjee

Rupee Overboard!

Rupee Overboard!

The Indian currency has fallen by nearly ten rupees to the US dollar in the last couple of months to a quarter. The explanation given to us by the Chief Economic Adviser to the Finance Minister is that   the FIIs are selling their debt and repatriating the money towards the US where the Federal Reserve has indicated that it will not be taking on more debt towards the cool and cold months. The implication, despite the trillions in US borrowing is that the Federal Reserve thinks the US economy may be reviving at last. Or so thinks the outgoing Governor Ben Bernanke replete with several ifs and buts.

Meanwhile the Indian economy, like any bank facing a run on its resources, is under intense pressure. This is aggravated because our banking sector is both small and under- capitalised and not well configured to take on rapid outflows of this nature.  The rupee, like the currency of any country nowadays, is underpinned by the working economy and its fundamentals. And all parameters of these assessments are also very weak at present. So what is the consequence?

• Industry is at a near stand-still. No growth. No fresh investments to speak of.
• Exports are unable to leverage the weak rupee fast enough given the speed of its descent. In fact many exporers are caught out because of fixed price contracts in rupees wherein they cannot get the benefits of its rapid  fall.
• The balance of payments is tilting sharply against us.
• The rupee is not stabilising, even at Rs. 60 to the US $. After the Finance Ministry tried talking it up, it went from Rs. 60 to the $ to 59.70 to the $, which is a very pessimistic reaction.
•  The fundamentals or the potential of the economy is not enthusing the money markets and there is no confidence in the quality of our governance.
•  The rupee will fall further because no structural adjustments are being made to stimulate the economy and spur infrastructure development. The Government has no big idea on how to arrest the downtrend.
•  Import bills will go out of control and lead to both shortages and the wreckage of budgeted allocations, particularly for petroleum and defence purchases, both of which go into tens of thousands of crores of rupees.
• Price rises at every level, production costs, wholesale and retail price points are inevitable, as the rupee devalues spontaneously.
•  This is not a temporary blip. It is indicative of a deep malaise of a mismanaged economy.
•  The Government is not doing enough to stimulate growth in any direction. In fact it is paralysed and in denial.
•  The rupee not just depreciating but free- falling. The exit of foreign money is a thumbs down from the globalised economy of this particular emerging market and member of BRICS.
•  The Indian stock- market will take a hiding as opposed to a beating.
•  An external event in the US has made a mess of our large domestic economy because of our currency volatility and lack of action to help ourselves.
• Our deficits will go out of control.
• Global rating agencies will revise our rating downwards to “Junk” status, making international borrowing difficult and even more expensive.
•  If the automated devaluation brought on by the rupee makes some asset classes attractive, there may be slight recovery because of arbitrage opportunities and bottom-fishing.
• But a garage clearance sale is not what a worthwhile economy is about.

(572 words)

June 20^th, 2013

Gautam Mukherjee

Land Ho!

Land Ho!

In the days of sailing ships, a reliable sailor climbed up and sat high up the main mast in a “crow’s nest” perch, and it was his job to look out for dangerous reefs, shoals, other ships, anything unusual in the weather, and essentially, land, as soon as it appeared on the horizon at the end of a spyglass, the one- eyed gadget used by seafarers then.

What is the economy of Bihar about, says the man in the metaphorical crow’s nest?  Is there anything objectively worthwhile in the so-called Bihar model of development, in the workings of a poor state, compared to say, Modinomics, as applied to the already relatively prosperous state of Gujarat?

Chief Minister Nitish Kumar of Bihar is sometimes mentioned as a  prime ministerial aspirant and doesn’t think much of either his erstwhile BJP deputy Sushil  Modi, or the more famous and dynamic NaMo being projected by the BJP.  

He implies, echoing the ruling UPA, that Modinomics is not what it is made out to be and the Gujarat development model is not suitable elsewhere in India because it does not carry all sections of the population along. The BJP has accused him of treachery openly, now that the JD(U) has pulled out of the NDA, but has for long felt uncomfortable with Mr. Kumar’s barbs and assertions.

Mr. Kumar implies that Mr. Narendra Modi is less than secular, even though the definition of secular as applied here means a pronounced pro-minority tilt rather than the even-handedness to all sections that NaMo favours.

In Gujarat, the Muslims who constitute the largest minority as they do in Bihar, are by no means used at election time and ignored at other times. The Gujarati Muslims have seen the benefits of Narendra Modi’s development economics and voted solidly in several instances for his Government and Party. They do not seem to be haunted by the ghost of the Godhra Riots of 2002, much as some people would like them to be.

In Bihar, the old politics of caste and community continues largely unabated, with a fresh overlay of entitlement politics for economically backward people added to the mix.

Bihar is economically backward because of step-motherly treatment from the Centre, claims Mr. Kumar, blithely ignoring the gross inefficiency and corruption that the state has long suffered, along with horrific law and order problems. This is the same thing that neighbour Ms. Mamata Banerjee of West Bengal, as well as the preceding Left Front Government there have always claimed.

Mr. Kumar has done relatively better, improving both governance and law and order compared to his predecessors, but the Bihar situation, economically and politically, continues to suffer from its legacies.

By way of contrast, Mr. Narendra Modi has made a reasonably good thing better over his successive terms in office in Gujarat. He is therefore sometimes accused of taking undeserved credit by the UPA.

Narendra Modi, as the BJP’s most likely prime ministerial candidate, and current head of the election strategy for the party, is seen as a political threat to his survival by Mr. Kumar . Hence the JD(U) pull-out of the NDA after 17 years, and a possible realignment with the emerging “Federal Front” or the UPA is on the cards.

The UPA however is already loosely allied with Lalu Prasad of Bihar as well as Ram Vilas Paswan who both expect a political windfall out of the parting of BJP and the JD(U) at the state level in  particular.

But after all is said and done, Bihar and UP are inordinately important  to the general elections coming up in a few months. They together account for about 160 seats in the Lok Sabha. Both states are renowned for their politically savvy populations, and willingness to be counted. They  are also largely backward, economically speaking, and the populace and the state government seem to be in denial about their continued inefficiency.

Mr. Kumar sees political capital in this very backwardness of Bihar, and emphasises works to uplift the poorest and most underprivileged from their mire of poverty. He does not so much rely on market- based or private-public sector collaboration or strategies, as entitlement funding.

He relies on the World Bank. He calls for special status for Bihar as a right from the Centre. He tries to join hands and make common cause with other economically backward states. He implies that he is trying to right a wrong of historical neglect suffered by Bihar and others.

Mr. Kumar thinks Modinomics is for the rich and big business. It is not inclusive. It does not carry everybody along. His largely rhetorical economic thinking plays quite well with the voters particularly because of his own underprivileged background and the victimhood politics of Bihar.

Does all this do anything to put Bihar on fast track to development? No it does not. But with the split in the BJP-JD(U) alliance and the impending general elections, the question may have to hang in the air for some more time.

(834 words)

June 17^th, 2013

Gautam Mukherjee

The Plummeting Rupee

The Plummeting Rupee

There is no plum in plummeting even though it is there in the spelling. This free fall in the value of the rupee has been given temporary pause by the Fitch upgrade of the Indian sovereign credit outlook to “stable” from negative. But the trend line is downwards, and is going to impact our balance of payments, imports, reserves, inflation, deficits and image. Not to mention tourism and studies abroad.

A falling currency weakens every nook and cranny of the economy and cannot be viewed in isolation.

The declining value of our money, partially convertible as it is, signals a failing economy. And being told not to panic by the Finance Minister in an era of 24x7 scrutiny by expert observers, won’t make it better or make it go away.

And the rupee’s inexorable decline has been steady to rapid in recent times.  It has declined 5.5% in value since January 1^st, 2013 and 7.5% in the last month alone, since May 1^st 2013. 

Chief Economic Adviser Mr. Raghuram Rajan says the Indian rupee is declining because of debt outflows occasioned by the US Federal Reserve saying they may taper off asset purchases in September.  So, to interpret Mr Rajan’s explanation, emerging market money is rushing back to the US to get in under the eiderdown before it is too late.

But even then, why this single reason should cause such sharp declines in the rupee’s valuation is unclear to other observers and analysts.

The SBI Chairman Mr. Pratip Chaudhuri may have an alternate perspective on why the rupee is weakening so drastically. He is lamenting the terrible IIP data of June 12th that shows growth at a dismal 2% for April. This even as retail inflation is at 9.30% according to the Government’s self- serving analysis, though actually consumers know it is well into double digits.

If manufacturing in India is at a near standstill and overall GDP is at 5% for this fiscal, which is at least 3 to 4% points below levels required to both run our economy properly and alleviate poverty; then we are turning into a nation of traders alone. And traders will have to contend with much greater volatility in their fortunes.

The more proximate reason is that yields from debt instruments decline sharply if the currency goes down over 12.5% in six months! So why shouldn’t FII’s, and other domestic players for that matter, exit fast? 

Though the cart and horse of it is that the FII’s have pulled out over $3 billion from Indian debt instruments in the last 14 trading sessions alone.

The Stock Market is reflecting the gloom with regard to the IIP and retail inflation figures too. It has been in the doldrums ever since 2008 for one reason or the other. And the rupee has declined from the forties to the US dollar to nearly 60 in the interim.

Global ratings agency Fitch is enthused with the recently announced decline in the fiscal deficit figure over the budgeted one, even in a sharply slowing economy. Our 5% GDP figure for this fiscal is the lowest in a decade.  Still it is better than a further threatened downgrade and is most timely.

The trouble is that UPA has paid scant attention to the income side of the ledger for a very long time and this in policy terms has proved disastrous. It may be too late for this Government to do anything about it this late into its term.

There are just months to go before the general election. But given a good monsoon and the thousands of crores that will be poured into the election machine, the economy is due to revive in  the typical Indian way. 

Which is, a combination of the official and unofficial economy joining hands under the table.  As for the value of the rupee, it is unlikely to revive any time soon, unless there is a gush of dollars flowing into the country for some reason at present unknown. Stranger things have been known to happen at election time.

(686 words)

June 13^th, 2013

Gautam Mukherjee

The passing of the baton

 

The passing of the baton

The Bharatiya Janata Party has been marked by inner conflict resulting in both losses at the hustings and popular perception. There has been a longing on the part of its supporters for a more cohesive entity led by a strong leader. This has been singularly elusive through almost 10 years of sitting in the Opposition. And this following on from a bid to power in 2009 led by Mr. LK Advani that did not succeed.

 Now the ruling alliance is riddled with shortcomings and failures on multiple fronts, but still there is a feeling that the Opposition, including the principal Opposition which is the BJP, is unable to exploit the situation to its advantage. The frequent polls to assess the national mood now do however show a positive outcome for the BJP and the NDA and a consistent thumbs down to the ruling UPA in the next general election.

The road ahead to a number of assembly elections followed by the general elections by May 2014 latest, calls for a singular focus on the part of the Opposition. While The Left stands some chance of clawing back West Bengal from the Trinamool Congress; the BJP has realised its bid for power in the general elections needs a tall leader that enthuses.

That is why the RSS and the bulk of the BJP stalwarts have backed the elevation of Mr. Narendra Modi to the pole position on the Election Committee.  This has been achieved with a struggle, and has been followed by the protest resignation of Mr. Advani from all his party posts even though his resignation has not been accepted, and talks are on to mollify him.

The central point however remains that the BJP was all set to snatch failure and defeat from the jaws of victory if it didn’t act to unite behind a tall leader.

 And Mr. Modi is considered to be the tallest leader by the rank and file cadres in the BJP and the RSS, and a number of senior leaders, and they, above all else want to be led into the general elections by him.

President Rajnath Singh has been both statesmanlike and courageous in the face of some stalwarts of the BJP disagreeing,  to take a principled stand for the good of the BJP and beyond, for the people of this country. The same people who are looking for a viable alternative to the discredited UPA.

Sure, the elevation of Mr. Narendra Modi could result in the JD(U) leaving the NDA alliance. But this is expected, and will not leave the prospects of the JD(U) in Bihar unscathed, as a recent by-election in a JD(U) stronghold that went to Mr. Lalu Prasad’s party has demonstrated already.

And there may well be other defections or unreasonable leveraging in return for support. But all of this will eventually have to reckon with a core tally for the BJP in the general elections that is projected to be enhanced because of Modi’s leadership.

The next Government will be formed after extensive negotiations with regional parties and independents anyway, whether it is the UPA or the NDA that ends up trying to muster the requisite numbers.

And the Third Fronters are hoping to tilt the balance in their own favour. 

So, the best bet is to try and get as many seats as possible on one’s own. This will be the endeavour of both the Congress Party and the BJP. After that, depending on how many more are required to get past the 272 mark, the contours of the chief contender will become clear.

But is there a shift of policy in the BJP in favour of development politics and good governance? Elevating Mr. Narendra Modi despite some controversies that dog his image would seem to suggest so.

And the party rank and file, like so many other BJP enthusiasts amongst the general public, do not seem to care. They are looking forward not back. As are many Muslims that have been used  at election time and ignored thereafter by the UPA.

Mr. Modi meanwhile has developed a track record of garnering Muslim votes in Gujarat. There is no reason why he won’t be able to do so around the country as well. As a proven developmentwala, Mr. Modi actually does deliver on prosperity to all sections of the population in Gujarat, and given the chance he is likely to do so nation-wide as well.

There are some within the BJP and the NDA who fear they will lose their influence with Modi’s  elevation. But logically, it does not help them if they resist the will of the majority in the Party arrived at in a democratic manner.  Mr. Modi has to concentrate now on wresting power from the UPA.

Internal squabbles have to be relegated to the back- burner to let him concentrate on this great challenge. There are fortunately enough senior leaders to conduct those back room negotiations to assuage the anxieties and hurts of those who feel ignored, passed over, or even insulted. Since some of these aggrieved people are very senior and talented they must not be let go of. But Narendra Modi himself has to concentrate on winning as many seats as he can first and last.

It is also true that the ruling alliance will have to contend with a very strong orator with a proven track record over successive terms in Gujarat. One who is also much appreciated by big business and industry for his pragmatic support.

In an era of rampant corruption, Narendra Modi stands out for his lack of taint throughout his tenure. This is indeed very attractive particularly because it has grown so rare in public life.

It is true there are other good men like Mr. Chouhan in Madhya Pradesh, Me. Raman in Chattisgarh and Mr. Parikkar in Goa. But fortunately they all support Mr. Modi’s elevation and acknowledge his primus inter pares stature.

Our national security too is in a shambles. Narendra Modi is on record about his desire to tighten up this aspect given the chance. He has done what he can at state level in Gujarat, but even there, lack of authority over central resources and so forth have hampered his best efforts.

The Congress Party as such will have to revamp its own poll strategy now as the inexperienced Rahul Gandhi is unlikely to be able to take on Mr. Modi and his team without considerable bolstering. But the first order of batting is to consolidate this clarity of purpose in the BJP that has come not a day too soon.

 (1,099 words)

June 11, 2013
Gautam Mukherjee

Land & Development

Land & Development

When it comes to Real Estate in India, the money bags instantly start to jingle. All of it appreciates in value via a one way trajectory. The very good, like the 3500 odd sq.ft. Duplex flat in Samudra Mahal building in South Mumbai, bought very recently by specialised glassware maker Borosil for Rs. 43 crores, shows you just how good it can get.  Scarcity, maintenance, location, amenities, all put together, breed bumper profits.

And any old hovel or piece of land also appreciates, anywhere in this country, even in troubled Kashmir or the bad lands of Bastar. Land and buildings simply never lose value here. The market may slow from time to time cyclically, even go into hibernation, but prices never retreat. There may be a distress sale every now and then but it has no effect on the overall rates. If an old, unsafe building falls down in the rains, it provides an opportunity to build a new one in its place and make money all around.

The Realty Bill, or The Real Estate Regulatory Bill, recently passed by the Union Cabinet for enactment into law, will be tabled soon. It seeks to regulate builders to protect the interests of the investors. Builders will be required to place the proceeds of investor payments in an escrow account to the extent of 70%, and use the money only for the building they have received the money to build.

They are not going to be allowed to sell space to speculators, cartels of brokers and “investors” etc. before all permissions are secured. They might however be able to access bank funds more easily after all these niceties are observed. There are a host of other provisions intended to provide greater transparency and accountability. There is also a redressal mechanism by way of an appellate and a dedicated tribunal.   The ideas, in short, are impressively utopian, but surely there are loop holes?  

Yes there are. The biggest one is to do with the threshold itself. The proposed minimum plot size of 4,000 square metres to be covered under the legislation leaves out all the smaller developments. It also tempts developers to apply for sanctions of areas less than the threshold that would bring it under the ambit of the new law being proposed.

Besides, many redevelopment projects and stand- alone developments are easily below this 40,880 sq. ft. minimum. A developer could be tempted to apply for segments below 4,000 sq.m. under different names and configurations to dodge this law.

After all, the builders can’t be thrilled with this. They have been putting in the seed capital and then working with free funding from the buyers. Now they can maybe access bank funds for which they have to provide collateral and pay interest. Their affairs will be watched. Their books and cash flows will be scrutinised. How can they turn an anything- goes business into a nice neat one? But the Government intends to try.

But, says the investor fraternity who gain from the builders and their “soft launches”, the media watch-dogs who run TV programmes on real estate and sell print supplements full of advertisements, the experts who opine and write, all this is going to put up the prices.

Those who own property already are not displeased at all. More regulation is good they think and good we bought when it was cheaper and not regulated so much. The aspirant and the arriveste however will have to fork out more.

Regulation will restrict. Ergo, corruption will prosper. And even if it doesn’t, prices will be enhanced for all this, along with FAR commitments, building bye-laws, material cost escalations, inflation and taxes doing their bit too.

But says Mr. Ajay Maken, the Minister I/C, it will check fraud and those builders who don’t build what they promise at all, and merely abscond with the swag, and/or declare bankruptcy after having abstracted it.

It will stop builders from using collections to start multiple projects and delay the completion of them all. It will compel them to finance their projects more substantially thus giving them the incentive to complete them on time.

It will make them own up on the actual floor area of flats and confess all the hidden charges.

Overall, the consumer will be protected maybe, but at a price. But first such a bill has to run the gauntlet of massive vested interest in order to turn into law.

(738 words)

June 7^th, 2013

Gautam Mukherjee

EXITS and ENTRIES

Exits and Entries

Steve Jobs of Apple Inc. did it. He came back to the floundering company he founded and took to great heights. He had a spectacular second innings as well till his premature death from cancer. But then Steve Jobs was a great inventor, an innovator of genius, a visionary, a man unique, yet with his finger on the pulse of what people wanted.

After he died, Apple is back to struggling and battling competition from Samsung and others. The head- and- shoulders- above- the- rest inventor is gone, and much that Apple does today is business as usual and tweaking existing products.

Infosys decided, in 2011, to go up the value chain in terms of the kind of work it would seek and do. NR Narayana Murthy, the charismatic founder, retired, and handed over operational control to fellow founder member SD Shibulal, and the overall mantle to his old friend Mr. KV Kamath.

As it turned out, Infosys could not make a success of its new strategy and slipped in ranking to No.3 behind its peers. Much of the blame for this come down has fallen on Mr. SD Shibulal, who though known for his execution skills could not pull it off in difficult market situations globally, and in the West in particular. There were few takers for expensive improvements and Mr. Kamath’s non-executive role could not do much.    

To save the company from further deterioration, the otherwise hands-on legendary builder of ICICI into an Indian bank of substance, Mr. KV Kamath, has stepped down as Non-Executive Chairman of Infosys. He has accepted an independent director’s position on the Infosys board instead.

Mr. Kamath hit the headlines some years ago as informal adviser to Mrs. Kokilaben Ambani of Reliance industries, when he helped resolve the battle royale between her sons Mukesh and Anil  with an acceptable division of the empire.

Of course, being “non-executive” meant that Mr. Kamath devoted only a week a month to Infosys, and the rest of his days to ICICI where he continues as Chairman.  Besides, it was not his skill-set to drive the business itself but perhaps present a communicator’s face to the world as a man of stature and credibility. 

His predecessor, and now successor NR Narayana Murthy, knows the business, the technology, the environment, and has the communication skills and stature too. The only thing is he is now 66 though in good health and form.

Though NRN, ( NR Narayana Murthy) brings to his second coming a full-time commitment as Executive Chairman,  he does have his son Rohan, a highly educated, (Cornell, Harvard),techie himself, in tow as his Executive Assistant at large.

Those who criticize the entire back to the future strategy employed here say that there is an inadequacy of leadership at Infosys, large as it is, perhaps because of an insistence to place only the founder members at the top. Now are they up to the challenges of the present and future or just yesterday’s men made good?

Mr. Murthy senior indeed hints at going after lower margin bulk business to restore Infosys’s bottom lines. But perhaps this is appropriate for now and the Western business environment is unlikely to see much of an upturn for years yet.

Elsewhere, it was a departure that tells a story all of its own. Mrs Aruna Roy left the Mrs. Sonia Gandhi led National Advisory Council (NAC). She is amongst a clutch of Leftist economists and thinkers such as Jean Dreze and Harsh Mander to do so, who all feel the NAC is not moving  to implement their far-left ideas fast enough.

Mrs. Roy wanted a uniform minimum wage fixed under MNREGA, but since it is really a variation of what the princes used to do in times of famine to keep starvation at bay, maybe her position is a little extreme.  

The NAC is having trouble funding its ideas already despite a complaisant Government. It can’t afford to drown the country in a veritable lake of deficit that is forming because of excessive welfarism zeal. Besides, widening and deepening freebies and perpetuating them does not necessarily ensure election victories anymore. Still, it seems easier to co-opt radicals than to harness their ideas.

Change does have its boundaries after all.

(707 words)

June 3^rd 2013

Gautam Mukherjee