Sunday, November 8, 2009

Trumpeting Elephant vs Hissing Dragon

Myanmar/Burma was once a part of British India. Does that make it ours again? Tibet once extended dominion over parts of China. Does that make China a part of Tibet today? Tibet once controlled parts of Arunachal Pradesh, albeit tenaciously and China today rules Tibet by force. Does that make parts of Arunachal Pradesh a part of China? Well, China indeed does think so. Logical? Yes and No.

No for the simple reason that such extrapolations and corollaries would confuse an already confused world. Logical, yes, because China is pricking India. Not just in Arunachal Pradesh , but elsewhere too. It is known to be stoking Maoist uprisings in Nepal--our neighbor. It is known to have supplied nuclear technology to Pakistan--our neighbor. It is supportive of the military Junta in Myanmar - our neighbor. It has close defence ties with Bangladesh, our neighbor. It is encircling India with a new sphere of influence. Why? Simple, the world is like its people. Countries are like people--groups of people, masses of people. Alone, a person would rule the world. Bring in two, and egos would begin to clash. Have three and politics will begin with one allying with the other of the remaining two. This is how humans behave and countries do. No one knows the future, yet everyone tries to control it. China is trying to control a future it knows will be an intensely competitive one. It will be competing against India for almost everything that matters. And it is trying to find friends and allies. And it is also trying to find issues and foes.

I don't want to sound nightmarish, but this is a blog and so I can say it. I believe that within our lifetimes we will see immense disturbance in the world we live in. Immense turmoil and upheaval, and all of it human engineered.

India is a rising power, but so is China. India is a democracy, China is a communist command economy with broad sweeps of capitalism washing over it creating a measure of discord amongst its people. China is progressing fast, India is progressing just a wee bit slower. But India is a free nation for its citizens. It is a democracy. China apparently is, but really is not. It is not a democracy. China has its problems of disparate growth with wealth concentrated in its eastern sea board. India has 1.2 billion people. China has 1.4 billion. Both nations are consuming ever increasing food, meat, energy and information. Already, everywhere in the world, there is competition between India and China for resources as both find themselves bidding for the same items on the world's markets. As both become prosperous, the pressures and demands will only increase. Today the one that has more money calls the shots. Tomorrow when both have loads of it and when mere money will not seem to matter, the games will begin. What we are seeing today is a mere prelude to it all. The same oil fields, the same mines, the same corporates, the same banks and both India and China out with their wallets.

And I shudder to think, that we think we have evolved and become more civilized. It was but 65 years back when the Second World War was raging and millions were dying brutal deaths in war and concentration camps. 65 years is not too long back and too little a time span to have changed fundamental human nature. We want things. We are materialistic. When we don't get things we tend to fight and when stakes are high we tend to kill. We are like that. Dangerous animals. Don't misunderstand forks and knives on well laid out tables with black liveried waiters for civilization. Perhaps we also like to masquerade.

So what am I trying to say here? Just that behind a complex interplay of politics lie simple fights for resources. Power is tempting because it provides access to resources, whatever they may be.

When China fumes over Dalai Lama's visit to Arunachal Pradesh, it is simply flexing muscles and asserting claims over resources if not indicating that it is capable of being a nuisance. But perhaps this time China has overplayed its cards. Tired of being quiet and hoping China will glower, hiss and then go away, India has realized that China will never let up. How can it? It needs to gobble up more and more of the worlds resources to keep itself going and growing. And so does India. For the first time the Tibet card is turning out to be hugely important. There are 1.2 lakh Tibetans in India, and the younger generation wants freedom. It wants China out of Tibet. Totally and completely. Tibet is the biggest buffer India could hope for between China and itself. Today China stands on India's borders using the Tibetan plateau. But Tibet even today is restive. It is not China. And as Tenzin Tsundue, the Tibetan writer and activist in Dharamshala who climbs hotel walls and displays Tibetan flags to ruffle Chinese visitors says, India has nurtured many Tibetans like him who have not seen Tibet ever, yet are aggressive supporters of complete freedom and willing to fight and die for their homeland. The Dalai Lamas presence at Tawang in Arunachal will be the best symbolism for India's territorial integrity. China will look on impotently as the Dalai Lama prays at the monastery that had welcomed him when he trekked into India in 1959.

President Obama has designated a special envoy to interface with the Dalai Lama. Why? Because he is important. Why? Because he exerts influence over Tibetans. So? He can swing the direction in which the Tibetan protest winds blow for China. So? He can be an important influence in keeping China in check. So? China can be prevented from focusing on destabilizing other countries, because it will need to fear its own destabilization. So? Americans will find a balance of powers developing and keeping each other busy, in this case India and China. So? America continues to exert influence over both as they balance each other. And influence gets you money. And resources. See, we come back to the same thing...resources?

The Tibetan movement is focused and clear. The Muslim-dominated Uighur movement is still nebulous and disparate. China also wants to use the present situation to create an Indian bogey. When internal unrest threatens to loom, create the bogey of an external threat to unite its own people. Taiwan is too small a threat, Japan is farther away, with Russia there are no serious issues, India is the best bet to project as a threat. So claims over Arunachal, India's protests, China's counter protests, the Dalai Lama somewhere in between - part of the great game. After all we are humans. Lets not forget that.

So what will happen? Obviously, I don't know! But what I do know is--the games have begun. The world will compete and then fight. Again. I don't think we can wish it away. What do you think?

Friday, September 4, 2009

Inflation in negative- Really ?

If you’ve been wondering why prices burn a bigger hole in your pocket each time you go grocery shopping even as the inflation rate stays firmly negative, here’s part of the reason: The official wholesale price index (WPI) tracks stuff you don’t buy, not unless you are caught in a time warp.

Time was when middleclass families across India cooked with Dalda or Rath brands of vanaspati oil. When toasts were raised with Double Horse whisky or Old Port Dix Rum. When scooters outsold motorcycles and teenaged girls ritualistically used Keo Karpin hair oil before stepping out. Consumer preferences have changed but the WPI remains stuck in the early 1990s. The base year for the current WPI series is 1993-94. It has 435 commodities in its basket, which includes 98 primary articles, 318 manufactured products and 19 fuel and energy sources as well as lubricants.

But the basket is completely out of sync with current consumption trends. For instance, the list of Indian Made Foreign Liquor has just five archaic brands. The same holds true for many other commodities, including manufactured goods and food items.

The WPI is illogical and outdated on other counts too, listing no other detergents but Sansar powder, manufactured in Bangalore and Surf made in Mumbai. This, even though HLL, which manufactures Surf, has factories in many parts of the country and does not base its price on products manufactured in Mumbai.
Similarly, the confectionery market has expanded but the WPI lists just 10 varieties of toffees manufactured by two brands - Parrys and Nutrine. Saridon is still the WPI’s brand of choice, as is Kolkata-based Deys Medical for personal grooming products such as hair oil.

The WPI basket no longer reflects market categories either. In 1993-94, pagers sold more than mobile phones as did scooters compared to motorcycles and cars. That’s not true in 2009.

The government says it’s hard to draw up a more representative list of products because of problems sourcing data from as many as 5,000 units. Therefore, it’s contemplating making it binding for companies to report monthly data. Once the new system kicks in, inflation data will be released on a monthly basis rather than weekly, as happens now.

Monday, August 31, 2009

NHPC IPO- another RPOWER in making

Within one day, the NHPC IPO has been oversubscribed 3 times ... when you look at the individual categories (Qualified-Institutional, Non-Institutional and Retail), you can see that entire volume is coming from the Qualified Institutional category. While the other 2 categories are only 15% and 50% subscribed, the qualified institutional category is oversubscribed by 6 times.

1) The Book Value myth:

Almost everyone I spoke to is talking about how low the Price-to-Book value of NHPC is. The book value of this company is roughly INR 18,000cr as of Mar 2009. This gives a P/B range of 2x to 2.4x for the price band. And managers, analysts, television talkers concentrating on this P/B and comparing it to peers - JP Hydro,NTPC, Tata Power etc. And therein lies the catch - NHPC's existing 3650MW (excluding subsidiary NHDC) yields the company an average power tariff of Rs. 1.62 per unit. The unconsolidated company's net worth as of Mar 2009 is INR 18,000cr. The PAT of the unconsolidated company is Rs.1,130 cr. This gives a Return on Net Worth of 6.7%....pathetic.

Let me give an analogy - your friend owns a house, which he got by inheritance. Today, the house is worth Rs. 4cr on the market (thats what everyone is telling you). But your friend's late great-grandfather had signed a rent agreement at Rs. 1lac per month till year 2030. So, would you pay your friend 4cr to buy this house today??

The catch is in the low price NHPC has been forced to sell power at by the power regulator for the last two decades. And this is why the Price-to-Book argument falls flat.

2) Leverage and the grey market:

Almost every institution gets a leverage of subscribe for 50cr worth of shares, you need to put in 2.5cr. At an interest rate of 12% for 15 days, the break-even (inclusing interest cost) works out to Rs. 39.30. And the stock is already trading in the grey market at Rs.46. So everyone is playing the game...get allotment and look to sell immediately.

And herein lies the second catch - the grey market is a very thin market and is only an indicator of price, not volume. If the stock tanks after listing, the ones who were not able to get rid of the shares in the "grey-market" will get burnt....which is what happened in the Reliance Power IPO in Jan 2008.

Funny how we can forget so quickly...playing fastest-finger-first with our bruised fingers from a year ago!

Thursday, September 25, 2008

RTC-The way forward or the sovereign fund that will make US the boss of everyone

Three of America’s top five investment banks have disappeared over the past six months, two of them this month. Bear Stearns went last March. Now, Lehman Brothers and Merrill Lynch have followed.
At least Bear and Merrill found buyers, the former with support from the Fed. Lehman has suffered the ignominy of having to file for bankruptcy. Only Goldman Sachs and Morgan Stanley are left standing and now they are becoming banks!!!
Billions of dollars and thousands of jobs have been lost.
The demise of three top investment banks has several implications. First, it calls into question the standalone model of investment banking. For most capital market activities, a stable base of funds makes sense. Banks, with their access to deposits, are better placed to succeed. That is what the acquisitions of Bear and Merrily Lynch by J P Morgan Chase and Bank of America respectively signal. In other words, ‘financial intermediation’, on the wane for many years, is back with a bang.
Secondly, leverage in banking itself may have to fall from the present levels. Thirdly, when investment banks come to be part of banks, investment banking too comes under the purview of central bank regulation.
Now US congress is finally acting to save US and world economy.It has proposed to create a RTC (Resolution Trust Corporation) that would buy bad assets from banks at an appropriate price.It would auction those assets later once markets have stabilised.How will this help the economy?It helps stabilise the value of assets of financial firms and prevents the collapse of highly leveraged institutions. Hopefully, the RTC will make a profit later; if not, the government incurs a cost equivalent to the losses on sale of assets the RTC has bought.
So far so good,but does not it end up rewarding the worst performer?
Will this model address the basic problem which is lack of capital at financial institutions.Whatever,US FED is hell bound to save these financial institutions and will do whatever possible to buy them.
AIG is already under US with 80% stakes and Freddie & Fannie now too belongs to US govt.
US is planning to pump at much as $1 trillion to save these corp.But the question is- can US afford this?
A trillion dollars is under 8% of US GDP. That is big but still falls in the lower end of bank recapitalisation costs consequent to economic crises- the range is 5-45% of GDP.US public debt, at $ 4.4 trillion, is 32% of GDP, pretty much on the low side considering that the limit for EU economies under the Maastricht Treaty is 60% of GDP (India has over 70% of GDP in debt). That means there is room for another $4 trillion of US debt. So, even if the bail-outs were to amount to $1 trillion, the US and the world economy can take that cost in their stride.

But now comes the tricky question, How will this nationalization of big financial firms going to affect the world.
This is something very few people are really looking into.This $1 trillion RTC will own the assets of these companies(like AIG,Freddie & Fannie).Now look at this scenario: AIG thru its JV with TATA,i.e TATA-AIG holds good percentage of equity in the companies like Reliance industries, RCOM, ONGC, BHARTI, BHEL, MINDTREE, INFY, MMTC, MTNL, NTPC, DLF, SBI, ICICI et al.
In short,most of the companies in India will have US govt. as its direct owner in some percent of equity.This is the data available with the SEBI, we still dont know the exact extend of investment of these US companies.This data is only for India.Extrapolate it to the whole world and you would see the US is probably creating the largest sovereign wealth fund (SWF) of this world.It will soon hold a sizable amount of equity in companies throughout the world.
Be it it India, China, Russia, Brazil or Argentina, US govt. may soon have a direct ownership of their companies(in small proportion though)
Imagine US holding stakes in China mobile and NTPC.It can then directly gain from the growth of both India and china's infrastructure.So the next time world bank sponsors a NTPC plant, we would know where its real profits are going?
The worst case would be, US starting to manipulate the working of these companies.
The sub prime crisis might end up being the blessing which will ensure a US supremacy over the world in this century too.But before that a lot of mess has to be cleaned otherwise before we can see a US diplomat in the board meeting of DLF we might see US borrowing from IMF and world bank to clean up its roads!!!!!!!

I just got this cartoon on net,i think the blog's idea can be captured in it

Wednesday, September 17, 2008

Saturday, May 31, 2008

Taxing the farmer

Associated Chambers of Commerce and Industry in India (ASSOCHAM) is planning to raise the issue of introducing income tax for farmers with finance ministry. This is based on the survey conducted by our great industry body ASSOCHAM. Surprisingly, the participants/respondents in the survey are 300 CEOs. The results of the survey indicate that about 80% of the CEOs (respondents) are in favor of bringing the farmers under the tax net. It is also reported that the industry body will highlight the results of the survey during their pre-budget consultations with the Ministry of Finance.

We need to appreciate the efforts of ASSOCHAM and the CEOs participated in the survey for their ‘concern on the revenues of government’.

Unfortunately, Government of India’s published reports indicate that at least 1.5 lakh farmers have committed suicide from 1997 to 2006 in the country. These suicides are reportedly higher in ‘richer, prosperous and industrialized’ states. NSSO survey on indebtedness of farmers during January to December 2003 reported that 43.42 million (48.6%) farmer households are indebted. Another report of NSSO reported that average expenses and receipts for cultivation per farmer household, during July 02 - June 03 for which the data is available, was Rs.20,315 and Rs.8,791 respectively. This means an average income of Rs.11,524 per annum which turns out to be Rs.960 per month per household. This income may be less than your ‘pocket-money’. This income will not increase significantly even if we assume that farmers are involved in other activities for income generation in villages.

Imagine a household (family of a farmer) managing all his needs and of his family in less than Rs.1000 per month. These average figures are for one agriculture year. If we consider the situation over the years the income may turns out to be negative (loss) in some years due to droughts, floods, crop loss due to pest and insect attack or price fall. Farmer has to save the income earned in one year to protect his family, if possible, against the possible crop loss in the subsequent year. We have insurance guarantee for many things in the country but not for agriculture. Government has introduced insurance against rainfall, recently, which is dependent more on political conditions rather than rainfall conditions. My father is still waiting for the rainfall insurance for the year 2003. Agriculture is one of the toughest and riskiest professions where farmer has to play with nature and unethical market forces.

Our great industry association and CEOs want to impose income tax on these farmers. Great concern!!! What prevented these CEOs and ASSOCHAM from raising the issue of farmers’ suicides with government if they are really concerned? How many of these CEOs and businessmen who earn lakhs and crores are paying the tax honestly? How many hi-tech companies are paying the salaries honestly without diverting the salary in the name of bonus to avoid income tax?

What was the logic of involving only CEOs as respondents in the survey? Why not farmers and others? That too the sample size of the survey was only 300. How representative is the sample?

When more than 1.5 lakh farmers committed suicide in the last few years what action did the association and CEOs took apart from conducting surveys for agri-business companies? What moral right do they have to ask farmers to pay tax? At least, let them clarify who the farmer is in this country. Is it Amitab Bachhan or Deve Gowda or a poor man who has dependent on agriculture for his livelihood? In fact, businessmen, politicians and people like Amitab are evading the tax by showing their income in the name of agriculture and these are the real culprits.

It is to be mentioned that the aggregate measures of support (AMS) offered to farmers in our country is negative. This means that farmers are cross-subsidizing consumers. This trend is not seen in any other sector. These CEOs demand the government to provide tax incentives for export if the Dollar value is falling to maintain their profits. When farmers are cross-subsidizing and committing suicides what prevented these CEOs from raising the issue with government? At least let them pay the right price for the farmers’ produce and stop exploitation.

Why our government is not holding any pre-budget consultations with farmers’ groups? Why only with industry bodies? Even god cannot save the poor farmers from the bias of government and the so called ‘CEOs’.

Friday, May 30, 2008

How Nobel is Nobel Prize

Noble prize is the ultimate recognition of Human mind.Its a vindication of the fact that Humans are there to support humans and it motivates us to achieve the impossible.Alfred Nobel in his will said "it should be annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind".And so begun the quest of humans for that coveted prize.

But the selection for Nobel Memorial Prize in Economic Sciences over the years has left me baffled.Noble prize has had its share of criticism over the year but of late a disturbing trend is coming up.The Noble bouquet(committee that selects the winner each year) is probably committing the greatest error of all time,which in many ways is belittling the prestige associated with it.

For last 10 years the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel(as its official called) has being going to the people whose theories are just theories and are not applicable in real world.Just going through the citation of few winners,I can quote the contributions as "for having laid the foundations of mechanism design theory ", " having enhanced our understanding of conflict and cooperation through game theory analysis" or "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms".

Well it doesn't take us time to see that most of the theories are either very complicated or practically impossible to implement.Moreover a general trend that has occurred is that most of the winners either supports capitalist model or gives more evidence to prove that its the best model.Here I will like to give a disclaimer that I m one the biggest supports of capitalism and firmly believes that its the best model for a society.But this doesn't make me a blind supporter of capitalism,as there are examples of countries that have done very good under different forms of economic order.USSR was the only country to survive in the great crash of 1929.Cuba has better and cheaper medical facility than USA.Even India is doing well under a mixed economy.China is the next super power.Then why there is such a obsession over capitalism .The answer lies in the new world order.An unipolar world where USA is always correct because it pays our bills.Most of the international organization get their majority funding from USA and thus are held on ransom by it.

Its this fear that does not allow the Noble bouquet to give Mohd. Yunus the Nobel prize for economics and give it to Robert C. Merton who devised new methods of determining the value of derivatives.Ok getting the value of derivatives is important for a trader on the floors of wall street but is it in any way solving the problems of millions of poor across the globe.Is it in any way bringing a smile on their faces?Is this theory giving them a bread for a day?The answer is a pale NO.

Now let us see what Mohd. Yunus has done,he pioneered the micro-finance system in Bangladesh.These Micro-finance or Microcredits are small loans given to entrepreneur who are too poor to qualify for loans from a traditional bank.In a country like Bangladesh where poverty is a way of life,his initiative has changed the life of millions.It all began with a loan of $27 given to 42 women who made around $ 0.2 profit each and repayed the loan to him in 1 year.Thus began the revolution known as Grameen bank which todays caters to over 10 million people.More than 94% of Grameen loans have gone to women, who suffer disproportionately from poverty and who are more likely than men to devote their earnings to their families.The Non Performing Assets of the Grameen bank stands at just 1%(Bear strean once a symbol of USA economy collapsed under these NPAs and Lehmann Bros. have a NPA of over 22%.Our own ICICI has 18% NPAs).The microcredit has brought a sea change in rural Bangladesh,where small entrepreneurs are mushrooming and is helping millions to get a decent and respectable life.Grameen Phone,another non-profit venture of Mohd. Yunus has provided cell-phone ownership to 260,000 rural poor in over 50,000 villages since the beginning of the project(polli phone) in March 1997.Its has changed the way rural Bangladesh used to communicate with their loved ones all over the world.It was these contribution that made him famous all over the world.

But the Nobel bouquet seems to live in another world where poverty is just another incorrigible word,where begin poor is align and bring smiles and joys on the face of poor is just a normal thing or is it the fear of new economic order which replaces big multi-nationals banks and huge financing with a smaller,non-profitable banks or is it the fear of showing the richness and goodness of a different economic approach which a capitalist US economy is so devoid of.For them "having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms" is an important achievement which according to Alfred Nobel's will of greatest benefit on mankind, deserves a Nobel prize for economics.If it hadn't been for the people like Bill Clinton,the achievement of Mohd. Yunus might have been forgotten in the pages of history.

It still amazes me how can the Nobel Bouquet think of giving him Nobel peace prize when he has been the greatest economist of 20th century.Is this not an insult of this great man or more importantly is it not the insult of the coveted prize itself,which has not been given the privilege to honor the greatest social-economist mankind has ever seen.