Not a Populist Maneuver

The Union Budget of FY2012-13, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market closing 1.19% in red. Most of the sectoral indices, except FMCG and Consumer Durables closed in red. India Inc has called this budget “a missed opportunity”.


The expectations from the Budget were low to begin with. But, while the expectations were low, wishlist was long. The table below is an example of the wish list of a few industries.

Sector Wishlist

Cycles
*Abolition of all duties

Infrastructure
*Revive power sector. Extend benefit under Sec. 80IA
*Exemption from MAT.
*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.
*Take a call on the no-go criterion for the coal blocks.
*Bring more private players into mining

Health Care
*Import duty cuts on import of equipments, drugs and chemicals.
*Declare it a 'National Priority Sector'.
*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.
*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon
*Reduce excise duty from 10.3% to 0.
* Retain S.A.D in lieu of Sales Tax.

Branded garment
*Remove 10.5% Central Excise Duty.
*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.

SSI
*Increase in exemption limit from Rs1.5cr to Rs5cr.

MSME
*Provide more reliable and accessible internet broadband.

Real Estate
*Single-window clearance mechanism for real estate projects.
*Better clarity on the indirect taxes being levied on developers.
*Development of a viable Real Estate Investment Trust (REIT).
*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports


Everyone wanted this budget to be “not a populist maneuver”, but in the same breath, they would roll out a series of exemptions and sops that they wished for from the budget.

One thing is for sure. This budget is not a populist maneuver and as the market reactions point out, Mr. Finance Minister has not been able to satisfy everyone. And this is exactly what works in his favor.

As we can see, almost every industry wanted tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has stuck to tackling the burgeoning fiscal deficit and concentrating on key areas of infrastructure, education, health and food.

There is effort to contain the outflows on subsidies, containing them to 2% of the GDP. There is emphasis on removing bottlenecks for the coal, mining, roads and energy sectors, and various customs reliefs and duty cuts have also been proposed for these sectors. Create capacities for storage, increasing supplies, reducing duties and customs in the agricultural sector are truly welcome. The allocations for education and health related schemes have also gone up by more than 20% overall.

The ‘aam aadmi’ does not get too much, but should not be disappointed as well.
Within limits, the budget has put something in their pockets too without taking away much. The income tax exemption limit has gone up to Rs2,00,000/- The limit for tax exemption on interests earned has gone up from Rs5,000 to Rs10,000/- The retail investor gets an incentive to invest in the stock markets, through the Rajiv Gandhi Equity Savings Scheme. Service Tax had been increased by 2% but then it was inevitable as the service tax was reduced in 2008 as sops given to tide over the financial crisis.

Black money and tax avoidance have been frowned upon. Amendments to Fiscal Responsibility and Budget Management Act, 2003, have been announced.

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.

This was the only chance for Mr. Pranab Mukherjee, to push for reforms, save some face by doing it, and bring India back on the growth trajectory. While there are many sectors that are disappointed for not getting any sops, the finance minister has done a pretty good job within his constraints.

Reining in the Fiscal Deficit

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.


So the budget being presented tomorrow by Finance Minister Pranab Mukherjee, might be the only chance to push for reforms, save some face by doing it, and bring India back on the growth trajectory. One of the primary concerns this year is to rein in the Fiscal Deficit.

Last year, Mr. Mukherjee had said that the government would target a budget deficit of 4.6 per cent for 2011-12, compared with the 5.1 per cent expected for 2010-11. We are nowhere close to the targeted figures. Subir Gokarn, the Deputy Governor of RBI has predicted that the Fiscal deficit would be close to 7% by the end of March 2012.

The government badly missed their own revenue and expense predictions. Government borrowing has been increasing. This has resulted in high interest rates. On the one hand the government is not able to control expenses; on the other hand, it is not doing much to improve revenues.

The four areas, which are being talked about and are very likely, the budget may target to rein in the fiscal deficit are Subsidies and welfare schemes, Foreign Direct Investment, non-tax revenues and tight fiscal management policies. Let’s look at the state of and the challenges facing each one of these areas.

Subsidies and welfare schemes: Year after year, the government has rolled out more and more subsidies (fuel, food, fertilizers) and welfare schemes (MNREGA, NHRM) for the people that have now turned into giants, with ever increasing appetite for cash. Various subsidies account for close to 3% of the GDP!

On the one hand, the government spends close to Rs55,000cr in food subsidies every year, on the other, the estimated wastage of food in an year is close to 60 million tones, approximately 20% of the total production. The prices of diesel and fertilizers are far from reality and decontrolling them or reducing the subsidy might result in early polls. Apart from this, there is lack of transparency about how the money is spent on various welfare schemes. Accountability and achieving the targets should be the key words in such schemes, but they are not!

Foreign Direct Investment: FDI in aviation, retail, insurance, and infrastructure are all pending since long and need urgent attention. There are benefits to be gained from FDI apart from the capital, in terms of technology, expertise, backward and forward linkages etc.

Simplifying processes for the foreign investors, reducing the number of days taken to conduct business and set up operations could all go a long way in attracting investors. Though it might now be difficult to build consensus in the Parliament and it may be impossible to push through bills like FDI in multi- brand retail.

Non-tax revenues: Divestment or sale of stake in Public Sector Undertakings is one way to raise money without putting burden on the common man. The Government failed miserably in this last year. The recent example of investors shying away from ONGCs follow-on public offering and LIC being ordered to pick up the shares to save the offer from falling through is a case in point.

Tight fiscal management policies: Except the Non-Direct Tax collections, the government has fallen short on almost all other forms of Revenues collection. The estimated shortfalls for the FY2011-12 are Rs20,000cr in Direct Taxes, Rs35,000cr in Non-Tax revenues, Rs27,000cr in Divestments and Rs37,000cr in Non-Debt Capital.

The expenditure has been as budgeted to a great extent, in fact it might be lower than budgeted as on the year end. With transparency and good governance, proceeds from divestment could go up. Measures to improve the tax and non-tax collections have to be put in place, including coming down heavily on corruption, which might be leading to money going into private coffers rather than the exchequer. Voluntary Disclosure Schemes or Amnesty Schemes could be put in place to encourage people to bring back the black money stashed away in tax havens.

Overall it seems that the fiscal deficit situation that we have gotten into is mainly due to mismanagement and poor planning. Taking calculated and tough stand and having clarity in the policies will definitely help rein in the fiscal deficit.

Budget Wish List

The Union Budget of FY2011-12, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market going up by close to 3% and breathing a sigh of relief for not having been burdened with more taxes or duties. Ofcourse, there was nothing to rejoice about at the same time. But at least status quo does not imply being worse, if not better!


The expectations from the Budget of FY2012-13 are low and the stage is set with the monetary policy review dampening the sentiments of the markets today. While the expectations are really low, wishlist from the Budget is long. And that might work in Mr. Mukherjee’s favor, if his budget shows even a slight sliver of hope for reforms.

Everyone wants this budget to be “not a populist maneuver”, but in the same breath, they roll out a series of exemptions and sops that they wish for from the budget. One thing is for sure. This budget will not be a populist maneuver, because whatever Mr. Finance Minister does, he will not be able to satisfy everyone. The table below is an example of the wish list of a few industries.

Sector Wishlist

Cycles
*Abolition of all duties

Infrastructure
*Revive power sector. Extend benefit under Sec. 80IA
*Exemption from MAT.
*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.
*Take a call on the no-go criterion for the coal blocks.
*Bring more private players into mining

Health Care
*Import duty cuts on import of equipments, drugs and chemicals.
*Declare it a 'National Priority Sector'.
*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.
*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon
*Reduce excise duty from 10.3% to 0.
* Retain S.A.D in lieu of Sales Tax.

Branded garment
*Remove 10.5% Central Excise Duty.
*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.

SSI
*Increase in exemption limit from Rs1.5cr to Rs5cr.

MSME
*Provide more reliable and accessible internet broadband.

Real Estate
*Single-window clearance mechanism for real estate projects.
*Better clarity on the indirect taxes being levied on developers.
*Development of a viable Real Estate Investment Trust (REIT).
*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports

As we can see, almost every industry wants tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has no magic wand and must tackle the burgeoning fiscal deficit. Hence, exemptions and indirect-tax reductions may seem farfetched. Though, the budget may actually pave way to implement the Direct Tax Code (DTC), taking at least small strides this year.

Increasing the personal income tax limit from Rs1.8/1.9 lakhs to Rs3 lakhs, increasing the Sec80c exemption limits, hiking the slabs for tax rates will all put more disposable income in the kitty of the common man.

Rising inflation, rising prices of food, petrol, LPG, had the households scrambling to cope throughout the last year and they do not expect this year to be different. The common man is worried about the sky rocketing education and healthcare costs, rising housing costs and declining amenities. They are looking at Mr. Pranab Mukherjee to ensure that they can plan their monthly budget with more precision and have improved standards of living.

Create capacities, reduce wastage, improve infrastructure, to increase supply in the agricultural sector. Have more clarity on the prices of fuel. People are confused. Are the Oil prices really independent? Will the diesel prices be deregulated? Why are we paying more and getting less of everything?

All these questions concern the common man and giving income tax sops alone may not be enough to enthuse them to vote you back Mr. Finance Minister.

Aliens Developers Pvt. Ltd. return our money

Facts:

Total Amount paid to Aliens till date - Rs 25 lakhs plus

Booked the flat in-  Nov-06

Promised Date of Delivery -  3 years i.e November 2009

Delay as on Feb 2012 - 2 years 4 months

Discussion for cancellation of flat initiated in - Apr-11

Formal letter to cancel booking given in-  Jun 2011( 2 months delay was due to Aliens not giving the resale/booking cancellation form on time. We sent back the form in two days)

According to the sale agreement, our money should have been returned in - 45days

No. of mails (only reminder mails) that we have sent to get our money back - 17
No. of times that we have visited their office to get our money back - 11

No. of phone calls that we have made to them to get our money back - lost count

No. of days that we had to wait to get to speak (only speak, NOT meet) to the Managing Director, Mr. Hari Challa - More than 2 months

All this inspite of both of us having very demanding jobs. We are not even accounting for the man hours lost, lost time with our daughter, and the emotional and mental stress that we are experiencing in the entire process.


They have given us 5 post dated cheques starting from May 2012 onwards to repay MY money. Reason: They needed to pay to HUDA. Using our money to pay to HUDA? Is that how companies work? I have spent 12 years analyzing companies and financial markets. These are tell tale signs!

This happened in November 2011 (8 months after the initiation of the talks). But we need our money urgently. So we requested to speak to Hari Challa. It took 2 months to get to speak to him.

Hari Challa offered to pay the rent of the house we are living in currently, or to pay us interest when we finally got to speak to him after chasing for more than 2 months. But all we are asking for is to repay our principal. That’s All. Not a penny more. Not a penny less. He promised to pay us Rs2lakhs per month till the month of May, and from then onwards the previously given post dated cheques would be honoured.

Forget about the interest that we would have earned on the Rs25lakhs over the years, even if they had returned our money within 45days of the letter of cancellation of booking, at the going Fixed Deposit rates, we would have earned an interest of Rs1.8lakhs till date. And as per the contract, for delay (leaving the grace period of 6 months), they should have paid us Rs3/-(much lower than the industry standards) per SFT per month, amounting to close to Rs1.2lakhs. But we are not asking for all this. We are just asking for our principal.

To get the Rs 2lakhs per month agreed y Hari Challa, we have made numerous phone calls, 2 visits to their office, written emails. We could get a DD of Rs 2 lakhs at the end of all this. But they have refused to give post dated cheques for the rest of the months. For the balance cheques, they made several commitments, every time it was TOMORROW. Broke each of their commitments.

If the MANAGING DIRECTOR’S word cannot be trusted, what kind of company is this? What kind of people work in this organization? Do we need to call them, visit them, and email to them these many times each month to get our own money back?

And Mr. Hari Challa wants to build a WORLD CLASS company. Indeed. He should be ashamed to even utter those words. With cronies of the likes of Suresh working for him, its not far before he is dragged to court by some disgruntled customer.

As Naseeruddin Shah says in the movie A Wednesday, its not that we can’t do things to hurt them (i.e take them to court or send goons or publisize what they are doing), its just that we are so caught up in our day to day work, that we do not have the time or the energy to do it. But there is a limit to tolerance. While people like us cannot resort to goons, we can surely take advantage of technology.

So as a first step, we are posting this on my Blog.

In the second step, it will go to the mailing list of our respective companies’ employees and contacts.

In the third step, we will post this on facebook, orkut and twitter. Including on the facebook account of Hari Challa. Let his friends also read about his world class company and him.

In the fourth step, we take this to the media.

Fifth and final step, gandhigiri. We will stand with placards in front of their office to get our money back.

It is sad that we even have to think of all this. We would glad just take our money and have nothing to do with Aliens ever. But they are forcing us to resort to all this. We are educated and busy people. We are ashamed that we have had to deal with people like Suresh who cannot even be called human, to say the least.

It is our earnest request to all the potential home buyers to not even consider any of the properties of Aliens.

Funding for agri-biz sector

This article was published in Hindu BusinessLine on February 6th, 2012
http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2863213.ece

Think venture capital and private equity funding and IT, Telecom and Bio-Technology industries crop into our heads, followed by humongous returns like 10,500 and 1,692 times the initial investment in the case of Body Shop and Apple Computers. In the year 2011, the PE and VC deals in India totalled close to $11.26 billion, up about 25 per cent from that of 2010

(www.ventureintelligence.in; investments in real estate excluded). In spite of the turmoil in the financial markets, the inflow of PE and VC funds have seen a decent increase during the last year. Most of the investments have gone to the IT and ITES and BFSI sectors.

However, a miniscule amount has also made its way into the agri-business domain. There were 11 deals, totalling $116.8 million in 2010 and 10 deals worth $89.16 million in 2011 for agri-related businesses, a decline of approximately 24 per cent.


WHY INVEST

Given that agriculture is far from the kind of characteristics that a funding agency looks for in a business, viz, new, upcoming, at least 300-400 per cent returns, the above statistics is not surprising. However, knowing that agriculture is seeing a genuine revival in India, with many business houses getting into agri and related businesses on a big scale, the need for funds in this sector cannot be denied.

Agriculture contributes about 20 per cent to the nation's GDP and accounts for 50 per cent of the workforce. But, what is it that will attract the PE and VC funds to this sector? First, demand for agri commodities is increasing and will continue to increase as the world at large becomes more conscious about food for all.

Secondly, the need to innovate in this sector becomes more important as less and less land is available for agriculture with each passing day. Thirdly, an agri business does not mean farming alone. It includes investment across the value chain starting right from the agri inputs, agri output, agri produce distribution and agri services including finance in several sub-sectors within the agri business such as agriculture, horticulture, dairy, fisheries, poultry and meat etc. So within the gamut of agri businesses, there is a lot of scope.

Fourth, entry of large business houses in this sector offers more organisation and structure to the sector and scope for collaborations and consolidations.

WHY STAY AWAY

Howard Van Auken and Clyde Kenneth Walter of Iowa State University in their paper, “Facilitating the Flow of Capital to Niche Agricultural Producers in Rural Markets” published in Small Business Institute Journal in the year 2010, rightly point out that “Availability of capital has historically been a challenge in rural markets.

Niche agricultural producers face a daunting task when trying to raise capital because they commonly have business models that are not well understood by providers of capital and, thus, they are considered high risk”.
It is true that most of the PE and VC funds by virtue of having been promoted by Silicon Valley protagonists, understand computer software, hardware and bio-technology, but may not understand agriculture or related businesses. They may be experts at knowing about bugs and viruses, implementation issues, but may be totally unaware about the quality of soil or the pesticides needed to control certain pests.

Also, the gestation period may be pretty high for agri-businesses with cyclicality built in. In comparison to knowledge based businesses, agri-businesses are not only difficult to scale up, but also time consuming. This is against the PE and VC funds characteristics which typically look to exit in 5-6 years.

Barring a few bigger players, agriculture primarily comprises of relatively unaware farmers, who might look at the entire process of obtaining funding as a hassle. Similarly, capital providers might perceive them to be too risky because of the size and unorganised nature of their operations.

Another major hurdle is that, the VC and PE firms generally look at larger ticket sizes. To elaborate, in the past 10 years, there have been 3,667 non-agri PE and VC deals in India, with an average size of $17.28 million each. Compare this with 62 deals in the agriculture domain with an average deal size of $11.14 million each, over the last ten-year period.

What Now

The market is definitely responding to the needs of the sector with dedicated funds like India agri business fund by Rabo bank and Omnivore Capital by Godrej Agrovet coming up. The key is to build in or include the social benefit/impact angle when doing the project evaluation. Also, a lot needs to be done to educate, organise and assist the capital-seekers so that they can benefit from such funds. Here, regulators will need to take a lead. Unless they help the sector organise and seek co-financing, it would be very difficult for the VC and PE providers to finance every single capital seeker individually.

Stocks dance to downgrade tune

This article was published in the Hindu Business Line on 23rd January 2012. The link is
http://www.thehindubusinessline.com/todays-paper/tp-others/tp-taxation/article2823782.ece

Credit Rating Agencies (CRAs) have been around since more than a century. In India, the first CRA CRISIL was started in collaboration with the international CRA Standard & Poor's (S&P) in 1988.


The role of the CRAs has been important in the investors' decision making process. However, international credit rating agencies like Moody's, S&P and Fitch have been under the scanner in the last decade for failing to signal the downfall of giants like Merrill Lynch (2007) and Enron (2001). The incorrect high ratings for these giants resulted in loss of credibility of these agencies.

CONSERVATIVE RATINGS

The Indian counterparts CRISIL, ICRA, FITCH, CARE and Brickworks are known to be relatively more conservative in their ratings. Maybe that is the reason why there have been only cases of rating upgrades amongst all NSE-listed companies in the last decade.

My friends, Chakrapani Chaturvedula and Nikhil Rastogi, from IMT Hyderabad and I studied the credit rating changes by CRISIL, ICRA, FITCH and CARE in all the NSE-listed companies for the last ten years.

We investigated the impact of credit rating changes viz. upgrades, downgrades, reaffirmations, withdrawals and initiations on the stock prices of the respective companies.

These ratings are supposed to convey the future prospects of the company and other relevant information about the company to the investors. They are supposed to act as “independent auditors” who provide a “certificate of creditworthiness” to the companies.

The companies have a tendency to delay the release of negative information or hide them. And since the reputation of the agencies is more at stake in case of incorrect higher ratings, they spend more resources to find negative information about companies. In such a scenario, a downgrade by an agency is of immense importance to the investors in their decision making process.

We find that downgrades result in significant abnormal losses (due to selling pressure) for the investors. The graph shows a downward trend for the cumulative abnormal returns after the event. We see that from the day of the downgrade (day zero), the prices fall almost 5 per cent on an average in the next 10 days.

HOW STOCKS REACT

The result of our study is also evident in a recent event when Moody's downgraded the outlook of the Indian banking system from ‘stable' to ‘negative'. We saw the banking stocks lose heavily in the days to follow.

Within the next 10 working days, the CNX Bank index had fallen by 16 per cent. Apart from downgrades, no other actions by the credit rating agencies had any impact on the stock prices.

Contrary to our expectations, we find that there is no significant negative impact of withdrawal and no significant positive impact of initiation on the stock prices.

These could be because the market might have already anticipated withdrawals and initiations much before the actual act.

Hence, on the day and after the day of the act, there is no new information being brought into the market. The number of upgrades (only 10) during the period was too few to meaningfully conclude anything.

Continuing with the story of the outlook for the banking system in India, S&P actually upgraded the rating of the Indian banking system just the day after the Moody's downgrade. In spite of that, the banking sector stocks continued their downward slide.

This once again showed that the market reacts to bad news swiftly in order to avoid losses. But it does not react to good news in the same magnitude.

With SEBI seeking more disclosures from the CRAs on the factors and process which results in the ratings, we anticipate that the rating changes will become more meaningful in the future as investors will then be able to make more informed decisions, especially in the case of conflicting ratings from different agencies.

Rate hikes and rising food prices

Originally published in the Hindu Businessline on 31st October 2011. The article was co-authored by Malini Anand (freelance writer). HBL somehow missed her name.

http://www.thehindubusinessline.com/features/mentor/article2582871.ece?homepage=true&ref=wl_home

Dr D. Subbarao, Governor of the Reserve Bank of India (RBI), is in a Catch-22 situation. If he doesn't raise interest rates, he stands accused of doing nothing to tame inflation. But if he does raise interest rates, his ability to control inflation, as the general public sees it, is rather limited. As can be seen from the graph below, the increase in interest rates by RBI hasn't necessarily resulted in an easing of inflation in past few years in India.

The Wholesale Price Inflation for September 2011 stood at 9.72 per cent. Fuel and Food, which together comprise 22 per cent of this index, have been a major reason for the increase. Fuel and Power inflation increased to 14.09 per cent, due to Rs 3.14-rise in the price of petrol on September 1, 2011. Food inflation was at 10.6 per cent in the week ending October 8, as against 9.32 per cent in the week before that, providing no relief to the aam admi.

Interestingly, food forms nearly 14 per cent of the Wholesale Price Index, and increasing the interest rates simply isn't the solution to controlling the food prices. There are several reasons for this.

Higher rural income
First and foremost, rural India is eating better. This is primarily because of a surge in rural income. As analyst Akhilesh Tilotia of Kotak Institutional Equities points out in a report titled ‘This Time is Ripe', the total income in rural India has gone up by 138 per cent to Rs 6,81,400 crore during a five-year period ending in 2009.
It need not be said this is primarily because of the Mahatma Gandhi National Rural Employment Guarantee Scheme, which has led to a significant flow of money into rural India.

Over and above this, the United Progressive Alliance is getting for the next Lok Sabha elections with the introduction of the Food Security Bill. The Bill is currently up for discussion and draft guarantees food to priority households i.e. those below the poverty line, as well as other poor families who have been classified as ‘general households'.
This move if and when it goes through is expected to drive food prices up all over the world, because of the sheer numbers (population) that we have.

There are other problems as well which will continue to drive food prices up in the years to come. A report brought out by DWS Investments suggests that “dramatic increases in the irrigation of crops across northern India have substantially depleted the region's groundwater. This would mean lesser water for irrigation across the Gangetic plain which produces a major part of the grain that India consumes.”

Grain and food production is also threatened by other long-term factors. One is the continued expansion of some of our biggest cities at the cost of taking over agriculture land. As environmentalist Mr Lester Brown writes in Outgrowing the Earth: The Food Security Challenge in an Age of Falling Water Tables and Rising Temperatures, “As a country industrialises and modernises, crop land is used for industrial and residential development.Secondly, as rapid industrialisation pulls labour out of the countryside, it often leads to less double cropping.”

Shrinking acreage
In fact the world is running out of land for agriculture. The world renowned hedge fund manager Mr Jeremy Grantham explains this in his newsletter titled Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever, “Only Brazil, and perhaps the Ukraine, has really large potential increments of output. Elsewhere, available land is shrinking. We have, though, had impressive productivity gains per acre in the past, and this has indeed helped a lot. But, sadly, these gains are decreasing.”

What also does not help is the prospect of higher atmospheric temperature.

Crop ecologists use a rule of thumb that for each 1-degree-Celsius rise in temperature above the optimum during the growing season, we can expect a 10-per cent decline in grain yields.”

As Brown points out “In India, the giant Gangotri Glacier, which helps keep the Ganges river flowing during the dry season, is retreating. The Ganges is, by far the largest source of surface water irrigation in India.”

Many of the above factors are already translating into almost doubling the Price of Food Index, Dhaanya, at NCDEX, the leading agricultural commodities exchange in the country.

The factors are way beyond the control of Mr Subbarao and he cannot do anything about it by increasing interest rates. So, will his interest rate hikes bring down the inflation rates? We doubt!

NJY: The Visionary

Mr. N J Yasaswy, NJY for most of us, passed away on Saturday October 8th, 2011. The founder of ICFAI, was of 62 years.


I had gone on my honeymoon to Srinagar. On our way from Srinagar to Pehalgaon, on a foggy chilly morning, we stopped for tea amidst the mountains. Just next to the tea shop, there was a small office with a board, IFEN (ICFAI Flexi Education). I laughed. And then marveled at the reach and penetration of ICFAI.

True to the vision of NJY, ICFAI reached, touched and penetrated into every conceivable market for Business education in India. I recall NJY telling us in one of the meetings, “Everyone is entitled to education. Isn’t an average student entitled to higher education in the Business domain? Does one have to crack the CAT and be the top 2,000-3,000 in a country where almost 10 lakh graduates want to pursue an MBA every year?” 
These were not merely words; he actually made a Business education possible for everyone. From 2 years full time MBA, to part-time and distance MBA, to executive MBA, he offered them all under the ICFAI umbrella. He has left behind an empire of 11 ICFAI Universities, 8 Icfai Business Schools, and many more Icfai National Colleges.

I joined ICFAI in 2002 as a Doctoral student. Just a week into the program, before meeting the man himself, accounts of his brilliance reached my years. I was told that he was the all India 1st rank holder for CA, CS and ICWA. And that the ICAI still kept his answer scripts as model answer scripts on their website. Well I never checked it myself.

But, I did not need to Whether he was the 1st rank holder in all three (CA, CS and ICWA) or not and whether ICAI kept his answer scripts as model papers or not, the man was a genius. Being a teacher, I am used to talk more and listen less. But when he spoke, everyone listened. Including me. Out of Respect and Awe. Not Fear.

I had the opportunity to interact with him on numerous occasions. Over the years, I happened to be in various committees and would meet with him in the review meetings very frequently. He used to take a lot of pride in the smallest of achievements of any of the ICFAI constituents. His eyes would twinkle as he would tell us about the Icfai cases appearing in many foreign author books, or ICMR making money through adsense, or ICFAI Tripura being a threat to the local Universities in North East. He had Big Dreams for ICFAI.

Last year when I was leaving IBS Hyderabad, I had met him and chatted with him for more than an hour. I was a bit skeptical at first. I was nervous that he might get angry, or he might not understand my reason for leaving. But I was so very wrong. He was extremely happy for me. He told me that I am doing the right thing. He told me that it was important for me to go outside the Icfai system and prove myself and that I was taking a good decision in concentrating my efforts on research, which also gave me the flexibility to focus on my family.

His consent and his approval of my decision meant the world to me. He told me that I was welcome to rejoin IBS after my stint at ISB. For any employee, this would be the greatest compliment, that she is welcome back in the same organization. And NJY, the founder of ICFAI, himself gave me that compliment.

The man is no more. But he has touched the lives of lakhs of people, Icfai alumini, faculty, staff, prospective students and the Indian corporates. We are all grateful to him for his vision and his creation. May his soul rest in peace.

The Economic Spiral

The last quarter (July-September) has seen most of the economic indicators going for a roller coaster ride in India. In September, Interest Rate was increased yet another time and the Oil Marketing Companies increased the Oil prices once again. Inflation has touched newer heights and the Index of Industrial Output (IIP) plunged to a 21 month low in July.

The rupee has been plummeting on average and the stock market indices have been volatile to say the least.
IIP growth decelerated sharply to 3.3% in July 2011 from 8.8% in June 2011, and from 9.9% in July 2010. The uncertainties in policymaking and the increasing loss of credibility of the UPA government are causing many companies to defer their investment and expansion plans.

The IIP compiled in India has in its scope the Mining, Manufacturing and Electricity sectors. The increasing dependence of the government on debt leaves no doubt in the minds of the companies that the government will not be able to spend on infrastructure and give boost to the economy if need be.

Increasing the interest rates makes borrowings more expensive for the companies and individuals. Hence they postpone or cancel their expansion plans. This results in depleted producer sentiments and reduced capital spending. This in turn results in a further lower IIP.

Owing to high costs of borrowing, a few companies might resort to layoffs or pay-cuts, leaving individuals with lower disposable income. Also, higher interests on deposits might lure individuals to save now and consume later. Both, lower disposable income and higher savings, results in lower consumption, leading to lower sales and profits, lower production, lower IIP, hence, lower stock prices. Looming threat of the US and European nations going back into recession is not helping the situation.

The exports to these nations are bound to be hit. While a falling rupee will benefit the exporters, the demand itself might drop.
The impact of an oil price increase on inflation cannot be ignored as well. It must be noted that increased oil prices directly result in an increase in inflation as it is a major component of the Consumer Price Index. It also results in increased airfares, shipping costs, public transport etc., thereby indirectly increasing the inflation further.

By letting the OMCs increase the price of oil, the government is contributing to a further rise in inflation on one hand, and adding salt to the wounds of the common man by further increasing the interest rates to control the same inflation.

Mr. Pranab Mukherjee was quick to point out that petrol has been deregulated and it is the OMCs who have in their review decided to increase the price. True. But then, who reviews and makes the decisions for these companies? And who benefits from such decisions?

It is clear from Table 1 that the Government being the majority shareholder in these companies, must be approving the price rises. Also, these companies distribute whopping amounts as dividends, not to mention the contribution to the exchequer in the form of taxes and duties (see table 1)!

Table 1:

Source: CMIE prowess database and Annual Reports of the companies

In the year 2010-2011, the amount of subsidies towards petroleum products doled out by the central government was Rs38,400 crores (source: union budget 2011-2012). A look at table shows that the OMCs together pay much more to the government in the form of taxes, duties and dividends.

Our central banker Mr. Subbarao claims that the rise in interest rates would curb inflation. Figure 1 clearly shows that increasing the interest rates have not been able to rein in the inflation in the past one year. So yet another rise in interest rate seems to be in vain.

Figure 1:

What seems to be the case is that the inflation in India is demand driven. So the need of the moment would be to ensure supply, increased productivity and efficiency rather that curbing the demand.

Curbing the demand would not help in achieving the growth targets. It would push the country into a slow growth or recessionary phase. That would be a real shame, considering that we have one of the brightest economists and a man responsible for the India
turnaround story as our current Prime Minister.
Source: RBI

Bourses, competition and technology

http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2523500.ece


These are interesting times for the Indian Stock Exchanges. We might see a new player in the stock exchanges arena soon, MCX-Stock Exchange (MCX-SX). Since long, MCX-SX's application has been pending with the Securities Exchange Board of India (SEBI) for a license to operate as a full- fledged stock exchange.

National Stock Exchange (NSE), since its inception in 1994, has revolutionized capital markets in India. Due to initiatives taken by NSE, the Indian markets are now more efficient. NSE has monopoly in the futures and options and wholesale debt markets and is the clear market leader in equities and gold ETF trading. 

This forced financial intermediaries to use technology which provides data feeds from NSE for all segments. On the other hand, BSE has more than 7,000 companies which are not listed on NSE, and hence traders were forced to separately work on BSE's online trading platform (BOLT).

Competition between exchanges

In addition, the Multi Commodity Exchange of India (MCX), market leader in commodity derivatives, provided its feed on software called ODIN, developed by its parent company (Financial Technologies). While intermediaries found it difficult to switch between softwares, they had no choice.

These technological woes of the brokers seem to be ending as competition between the exchanges intensifies. While a monopoly does enjoy economies of scale, but competition is always good for the end users. The fear of losing a customer to a competitor propels the companies to innovate, serve and optimize.

Owing to a recent development, wherein the Bombay High Court advised the SEBI to settle its dispute with the MCX-SX regarding its ownership structure which is preventing SEBI from allowing it to become a full fledged stock exchange, in a move to combat the almost certain entry of MCX-SX in the equity and derivatives trading arena, arch rivals, NSE and Bombay Stock Exchange (BSE) are joining hands to provide their stock price feeds through a single trading platform.

In another development just two months back, the Competition Commission of India (CCI), armed with the new competition law which became fully enforceable in the month of June this year, slapped a fine of Rs 55 crore on NSE for waiving transaction charges and abusing its dominant position in the Currency Derivatives (CD) segment. NSE has now obtained a stay by the Competition Appellate Tribunal (Compat) on the penalty, but has ended its zero-pricing policy with effect from August 22nd, 2011. In the same order, the CCI had instructed NSE to share its application programme interface code (APIC) with ODIN users.

Also, Financial Technologies (FTL), the promoter company of MCX and MCX-SX, a global leader in providing exchange and trading technology platforms and solutions, launched DMA (Direct Market Access) live a couple of days back. DMA live will provide clients with greater control and direct access to their trades, reducing transaction costs, increasing speed and efficiency of transaction.

More exchanges

This is meant to benefit the financial institutions and brokers. On one hand the consolidation of exchanges continues, on the other hand new exchanges are successfully capturing market share. Key to their success is technology.

Researchers are still trying to find an answer to whether fragmentation is good or bad for the investors. Maureen O'Hara and Mao Ye in their research paper, “Is market fragmentation harming market quality?”, published in the Journal of Financial Economics in June 2011, find that “fragmentation affects all stocks; more fragmented stocks have lower transactions costs and faster execution speeds; and fragmentation is associated with higher short-term volatility but greater market efficiency, in that prices are closer to being a random walk”.

Their results show that “fragmentation does not appear to harm market quality” and “are consistent with US markets being a single virtual market with multiple points of entry”. However, in the US there is the National Market System (NMS) linking all the different exchanges and investors can see prices of all the markets, compare and then choose the best.

MCX-SX, the potential new player in the exchange industry in India, with the backing of a global leader in exchange and trading technology (FTL), may change the game for the existing Indian players, NSE and BSE.

Economics and Politics behind demand for Smaller States

Published in Rediff on 22nd July 2011

http://www.rediff.com/business/slide-show/slide-show-1-the-economics-behind-demand-for-smaller-states/20110722.htm

The Telengana movement in the state of Andhra Pradesh has picked up momentum again and is causing losses to the tune of thousands of crores to the exchequer during Bandhs, not to mention the loss to the students who are actively involved in the movement.

The rationale of Underdevelopment stated by the Pro Telangana activists for the formation of a separate state seems a bit stretched, especially since the socio- economic data presented in the Srikrishna committee report and analysis by various other independent bodies do not point towards a dismal state of affairs.

The Gross District Level Domestic Product, which is The most important indicator of economic growth, has grown the fastest for the Telangana region, whether one includes or excludes Hyd, from 00-01 to 07-08.

Other important parameter, supply of water and electricity to the farmers, has also shown remarkable improvement over the years. For example, the Net agricultural area under Irrigation, land productivity, use of electricity for agriculture and growth of electricity consumption, have all improved much faster for the Telangana region (excluding Hyderabad) than the Coastal Andhra.

The expenditure on Education, which is one of the most important social issue, under the Sarva Shiksha Abhiyan (SSA), for the Telengana (excl Hyd) and the Coastal Andhra regions seem to be small and the difference can be easily reduced or taken care of with little bit of effort.

The numbers speak of the growth story of the region of Telangana. If the region was neglected say 20 years back, it should not be the reason for the formation of a separate state now.

If the politicians really want to help the people of Telangana, they should plan a drive to systematically get more resources from the state and central government to these regions. Rather than asking for a new state they should compete for the resources. The MLAs from these areas should put in effort for this. The common man is concerned about development and knows that forming a separate state may not be the wisest of solutions to it.

There are many other aspirants who have not yet filed the applications, but surely are watching the developments on Telangana very closely. Bodoland (Assam), Kosal (Orissa), Ladakh (Jammu and Kashmir), Vindhya Pradesh (Madhya Pradesh), Maru Pradesh (Rajasthan), are just a few examples.

As far as the economic development of these smaller aspiring regions are concerned, every state would have some developed and some not-so-developed regions. If all the not-so-developed regions start demanding for a separate state, there will be no end to the number of states that we might end up having.

While a few of these demands may be genuine, many of these cases seem to be driven entirely because of Political motivations and aspirations. The Center needs to take a strong stand and focus on the facts and figures related to the socio-economic growth in the region rather than bowing down to the bullying tactics of the politicians.

If smaller states are formed on the principles of ‘self-determination’, it is going to result in unstable states. Today, the Telangana people may get a separate state by showing intolerance towards Andhra people. Tomorrow, there will be clashes with people of other ethnic groups.

As Etzioni (1993) puts it in his research paper in “Foreign Policy”, what is required is “fuller representation, responsiveness, and democratization”. Not “self-determination by fragmentation”.

MBA Aspirants Speak UP

This post is not meant to hurt anyone. It it just a compilation of a few funny moments/experiences during interviews/presentations at a leading B-School in India. The compilation below highlights the state of primary, secondary and undergratuate education in the country.

It also highlights what the two years of going through the process of an MBA degree can do to the same students, as I have seen many of these students transform in the two years and ending up with plum jobs, doing extremely well in life.

1. Mutinity.
2. Kohfi Annan, Koffi Annan, Cophy Annan...All three in the same presentation by the same student!
3. Assacinatio....read Assasination.
4. I myself....
5. As far as my strengths are concerned, I am motivated, integrated and enlightened.
6. It extends the whole of India, except the state of J&K.
7. Mr. Natwar Singh is described as the one of the leaders of the congress party of the India.
8. Nitish Kumar is an Engineer. So he will do well.
9. Emotional Intelligence without emotions or intelligence is nothing.
10. Identifying Emotions- It is the process by which we can identify emotions.
11. Understanding Emotions-It is the process by which we can understand emotions.
12. Using Emotions- It is the process by which we can use emotions.
13. Managing Emotions- It is the process by which we can manage emotions.
14. The light gets enlightened.
15. There are many sensexes but for BSE it is the top 100 companies in the Government.
16. I want to conclude the IPO market.
17. Md. Younus has been helping very poor women with crediting.
18. Micro finance is the basic need of Indian countries like poor countries.
19. In India, the employees are paid according to their capabilities (what's the norm in other countries?)
20. They (Phillippines) have a low speaking population.
21. When the sun sets there, the people in offices there stop working. And when the sun sets there, the sun rises in India. Then we start working. So we have a 24*7 advantage...On Outsourcing.
22. Immediate effects of the flood immediately caused water clogging.
23. People died through electrician.
24. Communications through land lines and ATMs were blocked...ATMs?...used for communication?
25. What was the reason for Mumbai floods?- The drainage system...Oh! I thought it was the rains!
26. Wings are made for speed. Our country is on a speedy path...on the future of the Airlines Industry.
27. Low cost airlines do not provide foods and accommodation.
28. No frills airlines don't provide any comfort. Not even a complimentary airhostess.
29. Ordinary people could only see the plane flying on top of their heads.
30. I would like to introduce some introduction.
31. Mumbai-Pune expressway was cancelled for the first time.
32. The poor are very brand conscious.
33. Pakistan attack Kashmir to capture it.
34. The other Kashmir Government should be banned.

The Ten Experiences in a Slum

1. The first thing that would strike you in a slum is the noises that would engulf you as soon as you enter. A band playing the latest blockbuster for somebody's wedding, while a group of youngsters practising on the song "Jinke aage Ji, jinke peeche ji, jinke aage peeche ji ji,...." for the sangeet function, with the song playing at full blast on a 10,000watt player.

There would certainly be a temple close by with either the aarti playing or a group of middle aged to aged ladies singing bhajans on a microphone, with the assumption that the louder they sing, the better God will fulfil their worldly desires. And God alone save you if either the Ganesh Puja or the Durga Puja is round the corner.

Be ready to lose sleep for atleast 7-8 days while the jobless dwellers of the so called society busy themselves in dancing, dining and playing Tambola (gambling in the name of God) through the night, all ofcourse accompanied by very-very loud music.

Another very common form of noise is adults, both men and women, fighting at the top of their voices. It could be for water, for maintenance money, for maids, for the post of the society administrator, for throwing garbage near each other's houses, or any thing else that I am not even able to think of.

2. The next important aspect of any slum is the garbage. Mango and banana peels, biscuit wrappers, empty haldiram's mixture packets, disposable cups and glasses, cat, cow and buffalo shit, beer bottles, rice and dal thrown from the fourth or the fifth floor balcony, torn underwears, and most importantly the paan juice at every possible corner and walls.

Yeah, I must mention that dabur lal dant manjan's red juice and the colgate tooth paste's white froth are also patch worked on the area just below the first floor houses' balconies.

3. The stink will not be missed. Though it will take you sometime to realise its presence as you will be totally overtaken by the noise and the garbage initially. Urine, animal shit, rotten food, stink from the nearest Municipal Corporations garbage collection area (which seems to be located almost every one meter in a slum) are all common. And yes, the smell of alchohol is pretty common too.

A few other salient features, which must be mentioned, though may not have meat enough to write a paragraph about are:
4. Lack of fresh air and sunlight in houses.
5. You can see your neighbour beating his wife at night from the kitchen balcony and hear another neighbour abusing his wife from your own bedroom.
6. Mosquitoes.
7. Kids running around without footwear (everywhere....not only at home).
8. Highly decked up ladies in artificial jewellery for even festivals of lesser significance.
9. Many dwellers may own high end cars like honda cities and ford ikons, but would still throw garbage from their balconies and would still abuse their wives at the top of their voices.
10. And last but not the least, everyone, almost everyone of them, love their share of free food at temples, weddings and Ganesh Pujas.

Understanding Interest Rate Futures

Co-author: Satish Kumar

(Published in the Hindu BusinessLine on 26th October, 2009)

The Securities and Exchange Board of India (SEBI) and the Government had approved the launch of Interest Rate Futures (IRFs) in December 2008. Subsequently, on August 31, 2009, the National Stock Exchange of India (NSE) launched the 10 Year Government Bond IRFs.

IRFs, which are extremely popular derivative contracts around the world accounting for more than 70 per cent of the total derivatives trading, were introduced in India for the first time in 2003. However, they were soon suspended due to illiquidity and poor price discovery. Another attempt has been made by SEBI to launch them, albeit with greater preparations this time.

IRFs are instrumental in facilitating the management of interest rate risk faced by organisations and individuals while investing in floating rate debt instruments. Hence this move is being viewed as a step towards boosting the country’s debt markets. The market participants are also welcoming this move as IRFs will not only provide more depth to the market; it will also act as another instrument for investment.

IRFs are derivative contracts on a fixed income security, namely, bonds. The price of the bond changes with changes in interest rates (yield), both being inversely related.

This causes a number of organisations to incur capital losses when the interest rates drop. Investors in the bond market can now hedge against this loss if they anticipate that the interest rates might fall.

Contract specifications

Underlying: 10 Year Government Bonds with notion coupon rate of 7 per cent, semi-annual compounding;

Minimum contract size: Rs 2 lakh;

Minimum maturity period: 12 months;

Expiry and settlement: March, June, September and December.

Let’s say a trader ABC, buys 5,000 units of bonds with a face value of Rs 100, coupon rate 7 per cent, semi-annual compounding, and the yield to maturity (YTM) of the bond being 6.5 per cent. The price of this bond in the market is Rs 103.63 (calculated using discounted cash flow method). Hence, the investment for the trader will be Rs 103.63 x 5,000 units = Rs 5,18,150.

The trader would like to sell off his investment after one year. However, he is worried that the central bank might raise the interest rates by 100 basis points (1 per cent) in the coming year. If this happens, the bond will trade at around Rs 96.77 in one year’s time. This will result in the value of his portfolio going down by Rs 34,300 [(103.63-96.77)*5000].

What the trader can do is hedge for this loss using IRFs. He can go short on equivalent value of IRF contracts now and then close his position after one year when the bond prices go down.

Other tools

Other hedging tools such as interest rate swaps or forward rate agreements were available to the investors in India since long. However, they suffered from the usual problems associated with over-the-counter contracts, like illiquidity, high transaction costs, third party risks, etc.

Now, with IRFs, investors have access to a more liquid contract with almost negligible third-party risk as the clearing house of the NSE will act as the counter party to all the trades.

Most of the institutional investors, such as insurance companies, pension and provident funds, mutual funds and banks will benefit immensely from these contracts as they hold huge amounts of fixed income securities in their portfolios, either to fulfil statutory requirements or to have a desired level of risk.

There are two more instruments which have been approved but not yet introduced. They are 91-day Treasury Bill futures and short-term interest rate futures based on an index of actual call money market rates. Once these products are also introduced, the debt markets in India would have truly taken a leap forward. It would attract speculators too, making price discovery better and the debt market more complete and liquid.

(The authors are faculty member and doctoral student, respectively, at IBS Hyderabad.)

Charminar

The first time I visited Charminar during Eid was in 2009. Glittering shirts, glittering trousers, glittering bangles, glittering shoes, glittering bags, glittering sarees, glittering kurtas, glittering showpieces, were all on sale on the eve of Eid-ul-Fitr.

With odour as varied as from Mirchi Bajji to coconut oil, from axe deodorant to vanilla wafers, from coffee to itr, from leather to new cotton clothes, the nose was working overtime.

Everything under the sun was being bought and sold, with vendors vying in the most unique ways to attract attention of the customers. The most innovative slogan that I heard was, “Maalik mar gaya, rate gir gaya”.

There were heads all around. We stood at one end of Charminar and were pushed all the way to it (about one kilometer) by the crowd. We went and stood on the other end, and were pushed back to where our bike was parked.

At eleven in the night, people were eating chaat, dosas, haleem, mirchi bajji, paneer and chicken tikka and drinking irani chai and chaach (buttermilk). White churidar, white kurta, black burkhas with veils, dominated the crowds.

What Brindavan is to Holi, Charminar is to Id

It is fascinating to visit a place during a festival that is popularly celebrated there. What Brindavan is to Holi, Ahmedabad is to Navratri, Durga Puja is to Kolkata, Charminar is to Eid. A truly unique experience. Must experience for all.