The Left front is no longer a force to reckon within the Indian Parliament for the next five years at the least. After supporting the previous UPA government for four and a half years, the Left and Congress fell out over relations with the US – and India started the process of getting closer to the USA.
I have argued elsewhere that aligning with the US was a mistake that India was making. That India should either have done it sixty years ago, or failing that, stayed in the shadows for another decade, when a declining economic clout of the USA and a rising graph for India would enable India to negotiate from a position of strength. Some early signs of the differences that exist in the world views of the USA and India are now visible.
While the PM was expressing his love for George Bush, or requesting the autograph of the new president, the USA was, rhetoric to the contrary notwithstanding, busy downgrading its relations with India. One of the best articulation of this is in the speech that Robert Blackwill, the former US ambassador to India delivered on May 5, 2009 at the CII conference at New Delhi
The Indian viewpoint is well articulated by Brahma Chellany
In International relationships, what matters is not what is said, but what is done. And what has been done by the US is to relegate India to the third hyphen in the troika of Afghanistan-Pakistan-India. That the government of the day seems to have managed to sell this to the Indian public as a winner of a relationship is itself an acknowledgement of the Congress’s ability at Spin – the opposition has a lot to learn in this regard
Sunday, May 17, 2009
The dance of democracy – the next chapter begins
The greatest election mankind has ever witnessed has come to an end. The administrative machinery has performed a great job in collecting and delivering the verdict. That India can deliver a vote count of more than 300mn votes with a high degree of accuracy and within five hours or so of the start of counting (the trends were clear by then) is something we can all be proud off – the election commission can take a bow.
Now, it is time for analysis. In many senses, this election marks a turning point in the fortunes of our country. Though Dr. M Singh will start as the PM, it is highly likely that he will not end the five years as one. Rahul Gandhi is more than likely to take over somewhere along the way. This election will then mark the ascent to power of the first PM of India who has been born in Independent India. One of the advantages this may have is that we will be able to approach relations with our neighbours with none of the color that leaders of the earlier generation did – since there is no emotion involved.
A disquieting factor however is the likely continuing decrease in the quality of political debate. It may be postulated that politicians of post independent India maintained some (often very high) level of personal regard for those in opposing ideological camps. Even within the same political parties, differences of opinion were sorted out with some civility. Witness the case of Jawaharlal Nehru and Sardar Patel. Often the two stalwarts would not see eye to eye, but managed to work within the boundaries of decency. Presumably, this was in part because of the shared ideal of building an independent India, and the realization that others had, in their own ways, contributed too. I see this now disappearing – though surprisingly, this is visible in the quality of the PM’s response to the opposition campaign against him and his rule.
The quality of the political debate will also suffer because of the absence of the left front as a force in Parliament. Whether you agree with them or not, the Left did throw up a view point that was based on a certain ideology, and stuck with it. Those who revile them would do well to consider the effects of dilution of government ownership in banks – in the context of the global banking crisis, and the effective nationalization of most banks around the world. The stock market (not known for being very sagacious or far-sighted,) will, of course, celebrate the dilution of ownership and control that is now inevitable. This is only one example.
The Congress has much to celebrate. The Family is now firmly back, with a new heir apparent – who has bought in a sense of self-confidence to the party. While one could differ on the causes of the outcome, there is no taking away from the fact that Rahul Gandhi’s gamble of going it alone in the state of UP will be considered a success. With this result, the Congress ruling Family is back to its winning ways. Expect to see the party gain in strength from here on for some years.
Now, it is time for analysis. In many senses, this election marks a turning point in the fortunes of our country. Though Dr. M Singh will start as the PM, it is highly likely that he will not end the five years as one. Rahul Gandhi is more than likely to take over somewhere along the way. This election will then mark the ascent to power of the first PM of India who has been born in Independent India. One of the advantages this may have is that we will be able to approach relations with our neighbours with none of the color that leaders of the earlier generation did – since there is no emotion involved.
A disquieting factor however is the likely continuing decrease in the quality of political debate. It may be postulated that politicians of post independent India maintained some (often very high) level of personal regard for those in opposing ideological camps. Even within the same political parties, differences of opinion were sorted out with some civility. Witness the case of Jawaharlal Nehru and Sardar Patel. Often the two stalwarts would not see eye to eye, but managed to work within the boundaries of decency. Presumably, this was in part because of the shared ideal of building an independent India, and the realization that others had, in their own ways, contributed too. I see this now disappearing – though surprisingly, this is visible in the quality of the PM’s response to the opposition campaign against him and his rule.
The quality of the political debate will also suffer because of the absence of the left front as a force in Parliament. Whether you agree with them or not, the Left did throw up a view point that was based on a certain ideology, and stuck with it. Those who revile them would do well to consider the effects of dilution of government ownership in banks – in the context of the global banking crisis, and the effective nationalization of most banks around the world. The stock market (not known for being very sagacious or far-sighted,) will, of course, celebrate the dilution of ownership and control that is now inevitable. This is only one example.
The Congress has much to celebrate. The Family is now firmly back, with a new heir apparent – who has bought in a sense of self-confidence to the party. While one could differ on the causes of the outcome, there is no taking away from the fact that Rahul Gandhi’s gamble of going it alone in the state of UP will be considered a success. With this result, the Congress ruling Family is back to its winning ways. Expect to see the party gain in strength from here on for some years.
Friday, May 1, 2009
A LESSON IN 'SPIN'
A story doing the rounds on the internet goes:
Judy Wallman, a professional genealogical researcher, discovered that Hillary Clinton's great-great uncle, Remus Rodham, was hanged for horse stealing and train robbery in Montana in 1889.
The only known photograph of Remus shows him standing on the gallows. On the back of the picture is this inscription: 'Remus Rodham; horse thief, sent to Montana Territorial Prison 1885, escaped 1887, robbed the Montana Flyer six times. Caught by Pinkerton detectives, convicted and hanged in 1889.'
Judy e-mailed Hillary Clinton for information about her great-great uncle. Hillary's staff sent back the following biographical sketch: 'Remus Rodham was a famous cowboy in the Montana Territory. His business empire grew to include acquisition of valuable equestrian assets and intimate dealings with the Montana railroad. Beginning in 1883, he devoted several years of his life to government service, finally taking leave to resume his dealings with the railroad. In 1887, he was a key player in a vital investigation run by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important civic function held in his honor when the platform upon which he was standing collapsed.'
The story is false. But, it does serve to illustrate the role of spin doctors – something the Indian political parties desperately need. Most key parties in India are struggling to re-invent themselves, and in the process, creating a web of lies to entice new, first time, voters. Mid month will reveal who succeeds. Till then, we have to remember Churchill’s definition of a parliamentary candidate “He is asked to stand, he wants to sit, he is expected to lie”
Judy Wallman, a professional genealogical researcher, discovered that Hillary Clinton's great-great uncle, Remus Rodham, was hanged for horse stealing and train robbery in Montana in 1889.
The only known photograph of Remus shows him standing on the gallows. On the back of the picture is this inscription: 'Remus Rodham; horse thief, sent to Montana Territorial Prison 1885, escaped 1887, robbed the Montana Flyer six times. Caught by Pinkerton detectives, convicted and hanged in 1889.'
Judy e-mailed Hillary Clinton for information about her great-great uncle. Hillary's staff sent back the following biographical sketch: 'Remus Rodham was a famous cowboy in the Montana Territory. His business empire grew to include acquisition of valuable equestrian assets and intimate dealings with the Montana railroad. Beginning in 1883, he devoted several years of his life to government service, finally taking leave to resume his dealings with the railroad. In 1887, he was a key player in a vital investigation run by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important civic function held in his honor when the platform upon which he was standing collapsed.'
The story is false. But, it does serve to illustrate the role of spin doctors – something the Indian political parties desperately need. Most key parties in India are struggling to re-invent themselves, and in the process, creating a web of lies to entice new, first time, voters. Mid month will reveal who succeeds. Till then, we have to remember Churchill’s definition of a parliamentary candidate “He is asked to stand, he wants to sit, he is expected to lie”
Sunday, March 29, 2009
Unlearn the old
“Change is inevitable - except from a vending machine.” – Robert Gallagher
Usually, Geographic texts remain the same across generations. You would not expect your child to learn about one less continent, or one more Sun. But in these changing times, even this is not true. Since 2006, we are now missing a planet. Our solar system now has 8 planets and not nine as we were taught. Something fundamental has changed here.
The same seems to be happening to the rules of investing. For the past many decades – almost since the concept of “fiat money” came into existence, it has always been assumed that earnings determine stock prices – atleast over an unspecified “long term”. Millions of trees have been sacrificed to propagate this thesis, and many investment gurus have made their reputations based on this “style” of investment – not least the great Warren Buffet.
It appears we are now in the midst of a change of tectonic proportions – much like the removal of “Pluto” for the count of planets – where we will take away cash flows and earnings as the primary sources of stock performance and replace them by regulatory and government action.
Two proposals merit attention. The first, originating in the USA, is a proposal by the Financial Accounting Standards Board (FASB), to allow creative accounting (obviously couched in more acceptable language). This will now be discussed and put to vote on April 2. Girdle up for “Ostrich Accounting” from here on – defined as “if I refuse to see it, it ain’t there”. If you assume that most companies already use some variant of this – this report mentions that GE Capital Corp. uses mark-to-market on only 2% of its assets – you understand why most brokerage reports use the words “we believe” so liberally. Whoever claimed that that an analyst was paid to analyse, not believe!
The other report is from our own shores. In an obvious attempt to keep up with the Joneses, in India, the National Advisory Committee on Accounting Standard (NACAS) has recommended a deferment of AS-11. While there is a flicker of hope that this will be rejected – the Ministry of Corporate Affairs has not yet accepted the recommendations, it seems highly unlikely. India will therefore pad along the footsteps of the “most advanced” market in the world.
Key changes – looking at accounting books of companies for clues of financial performance will soon become like reading fairy tales – it already is in many cases – but will now become entrenched policy – not meant for grown-ups. Equity markets will now behave much like debt markets. Debt traders are trained to look at the key market rigger (the Central Bank) for direction on how to trade. Equity traders soon have to look in the same direction – if the Bank prints more green-backs, buy equity, if it prints more bonds, sell equity. Did anyone mention earnings here?
To paraphrase a quote “Every time I find the meaning of investing, they change it”
Usually, Geographic texts remain the same across generations. You would not expect your child to learn about one less continent, or one more Sun. But in these changing times, even this is not true. Since 2006, we are now missing a planet. Our solar system now has 8 planets and not nine as we were taught. Something fundamental has changed here.
The same seems to be happening to the rules of investing. For the past many decades – almost since the concept of “fiat money” came into existence, it has always been assumed that earnings determine stock prices – atleast over an unspecified “long term”. Millions of trees have been sacrificed to propagate this thesis, and many investment gurus have made their reputations based on this “style” of investment – not least the great Warren Buffet.
It appears we are now in the midst of a change of tectonic proportions – much like the removal of “Pluto” for the count of planets – where we will take away cash flows and earnings as the primary sources of stock performance and replace them by regulatory and government action.
Two proposals merit attention. The first, originating in the USA, is a proposal by the Financial Accounting Standards Board (FASB), to allow creative accounting (obviously couched in more acceptable language). This will now be discussed and put to vote on April 2. Girdle up for “Ostrich Accounting” from here on – defined as “if I refuse to see it, it ain’t there”. If you assume that most companies already use some variant of this – this report mentions that GE Capital Corp. uses mark-to-market on only 2% of its assets – you understand why most brokerage reports use the words “we believe” so liberally. Whoever claimed that that an analyst was paid to analyse, not believe!
The other report is from our own shores. In an obvious attempt to keep up with the Joneses, in India, the National Advisory Committee on Accounting Standard (NACAS) has recommended a deferment of AS-11. While there is a flicker of hope that this will be rejected – the Ministry of Corporate Affairs has not yet accepted the recommendations, it seems highly unlikely. India will therefore pad along the footsteps of the “most advanced” market in the world.
Key changes – looking at accounting books of companies for clues of financial performance will soon become like reading fairy tales – it already is in many cases – but will now become entrenched policy – not meant for grown-ups. Equity markets will now behave much like debt markets. Debt traders are trained to look at the key market rigger (the Central Bank) for direction on how to trade. Equity traders soon have to look in the same direction – if the Bank prints more green-backs, buy equity, if it prints more bonds, sell equity. Did anyone mention earnings here?
To paraphrase a quote “Every time I find the meaning of investing, they change it”
Tuesday, March 24, 2009
Regulating the regulators
Imagine a school with a strict teacher in every class. In one such class, are a bunch of kids playing with fire. While the teacher watches, the kids set fire to the window curtains. The fire spreads, and engulfs the school and burns down most of the infrastructure. It then spreads to the neighbourhood and affects the nearby buildings. While trying to bring the fire under control, and examining the cause of the fire, the school principle suggests that one way to prevent another such occurrence would be to appoint the errant teacher as the fire warden for the neighbourhood.
Sounds like a fantasy out of Alice in Wonderland? Welcome to the real world – this is how the financial system of the world operates cica 2009. Gordon Brown, in preparation of the G20 summit on the financial crisis, exported to the world by the USA and UK, writes
Having efficiently “supervised” an excellent problem situation, the regulators in the US have now suggested a Geithner plan to fix it. The plan involves a “put” to investors of banks and distressed asset funds, while transferring the entire risk to the tax payers. As Paul Krugman writes,
Sounds like a fantasy out of Alice in Wonderland? Welcome to the real world – this is how the financial system of the world operates cica 2009. Gordon Brown, in preparation of the G20 summit on the financial crisis, exported to the world by the USA and UK, writes
“I have learned from this financial crisis that the disciplines we expect of markets cannot be guaranteed without strengthened supervision. “Uh? Let’s see which part of the financial system that caused the breakdown was unsupervised. The most maligned are the hedge funds. Did these loathed vehicles need a bail-out – not really – for the most part, they just quietly wound down and exited. However, we have had multi-billion (totaling trillions of dollars) of bailout for supervised entities - banks, insurance companies, and investment banks. So don’t you see, the solution to the problem must be more supervision!
Having efficiently “supervised” an excellent problem situation, the regulators in the US have now suggested a Geithner plan to fix it. The plan involves a “put” to investors of banks and distressed asset funds, while transferring the entire risk to the tax payers. As Paul Krugman writes,
"Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard."Mark Twain could have been speaking about regulators when he wrote
"All you need in this life is ignorance and confidence then success is sure"especially if success is measured by negating the principles of free markets, and forcible propping up defunct organizations.
Sunday, March 22, 2009
What’s with this “political uncertainty”?
Most market commentators. when asked about the possible direction of the market in the near term, hide behind the excuse that “political uncertainty” leading up to the general elections will lead to subdued market performance. Almost as if it was not the job of the market to deal with uncertainty and make decisions in the absence of perfect information.
In any case, it appears that we are headed for another government comprising several political parties. Should an investor worry?
A look at the graph above indicates that the Indian economy left its earlier slower growth trajectory and embarked on a higher growth path somewhere in the decade of the 1980’s. This coincided with a drop in the vote share of the Congress – till then the single largest party with a dominant share of Parliamentary seats. The 1977 experiment at coalition was a miserable failure and led to a resurgence of the Congress. But only for a few years. For the last almost two decades, we have had minority governments ruling India. Over the same period, we have sustained a new and higher growth trajectory.
In fact, it would almost suggest, that the emergence of regional parties helped to increase the growth rate for the nation. A research paper on the “Politics of Infrastructure Spending” by Wilkinson 2006 mentions the following
What does this mean for the investor? Clearly, the election process cannot be blamed for uncertainty (it is certain that we will have a coalition government), nor for lower growth. The moot point though is whether growth is in itself needed for stock market performance. A paper by Prof Prabirjit Sarkar of Jadavpur University titled “Stock Market Development, Capital Accumulation and Growth in India since 1950” has this as its abstract:
Now that is a different existential question we need to confront!
In any case, it appears that we are headed for another government comprising several political parties. Should an investor worry?
A look at the graph above indicates that the Indian economy left its earlier slower growth trajectory and embarked on a higher growth path somewhere in the decade of the 1980’s. This coincided with a drop in the vote share of the Congress – till then the single largest party with a dominant share of Parliamentary seats. The 1977 experiment at coalition was a miserable failure and led to a resurgence of the Congress. But only for a few years. For the last almost two decades, we have had minority governments ruling India. Over the same period, we have sustained a new and higher growth trajectory.
In fact, it would almost suggest, that the emergence of regional parties helped to increase the growth rate for the nation. A research paper on the “Politics of Infrastructure Spending” by Wilkinson 2006 mentions the following
“Experience since the late 1980s has shown that coalition governments are formed and held together by the judicious spreading around of loans, grants and subsidies, which obviously limits the resources available to be spent on other projects. .. For example from 1999-2002 Andhra Pradesh got $763 million in “additional central assistance for externally aided projects in state plans” because of the influence of its governing Telegu Desam Party, the single most important coalition partner in the national NDA coalition government in new Delhi. The opposition controlled state of Bihar got only a tenth as much, despite a greater population and much worst absolute levels of poverty. However when a Congress-coalition replaced the NDA in 2004, it was Bihar’s turn to benefit from electing large numbers of MPs to a key coalition party, the RJD”
What does this mean for the investor? Clearly, the election process cannot be blamed for uncertainty (it is certain that we will have a coalition government), nor for lower growth. The moot point though is whether growth is in itself needed for stock market performance. A paper by Prof Prabirjit Sarkar of Jadavpur University titled “Stock Market Development, Capital Accumulation and Growth in India since 1950” has this as its abstract:
“This study examines whether there exists a long-term relationship between Indian share price movements and growth through capital accumulation over more than half a century period since 1951. Using the Autoregressive Distributive Lag (ARDL) approach to cointegration developed by Pesaran and Shin, our study shows that no long-term relationship exists between the gross-fixed capital formation (total as well as private) as percentage of GDP and nominal or real share price. There is also no relationship between the growth rate and share prices (both nominal and real). There is also no relationship if we consider the growth rates in share price.”
Now that is a different existential question we need to confront!
Reality check for executive factories
The IIM’s have long justified the rapid and unchecked increase in their fees on the grounds that students are assured of a good placement. Consequently, the institute and its dependents (the teaching staff) should charge “appropriately” to deliver “quality” education. In the case of IIM A, fees have increased from approximately Rs 1.5lakhs in 2004, to Rs 6lakhs in 2009 (CAGR of an astounding 32%). The unstated position appears to be that rather than being non-profit institutes of research and education, IIM’s should now be viewed as glorified placement agencies and finishing schools for graduate students. Incidentally, IIM’s make in excess of Rs2crs per year from placement fees alone.
The recently concluded placement session has been a much needed reality check for the IIM’s. Placement was slow, and students witnessed a salary drop averaging 30% across most IIM’s.
Maybe this will lead to some serious, and much needed soul searching. If the argument is that rising salaries are in some ways related to the “value add” that the institute delivers – then, one has to conclude, that the institute has actually added lower value to the current crop of students. I wonder if the students then entitled for a refund in fees!
The IIM’s seem to suffer from unbridled greed - that has been at the bottom of the current meltdown in the US. No justification can be offered for a 30% increase in fees year-on-year for over a decade (it started well before 2004). Linking fees to salaries ensures that students may need to take loans, and this restricts their ability to explore options of entrepreneurship and of working in socially relevant, but poorly paying jobs. This, when as a public institution, the IIM’s are adequately supported by the State (they have existed for over four decades, and have built their reputations over 3 decades of public support). Operating independence for a public institution cannot be divorced from responsibility to the public and its government. Rather than competing on increasing salaries and costs, it would be more appropriate if the IIM’s focused on creating a management education paradigm suited for the needs of a diverse and uneven economy as India.
The key success factor for the IIM’s has been their ability to draw within their fold, the cream of aspirants – and government ownership, a merit based entrance and low fees have each played a significant role in this. Change one, and the IIM’s will not be the same again. I hope the IIM’s are listening.
The recently concluded placement session has been a much needed reality check for the IIM’s. Placement was slow, and students witnessed a salary drop averaging 30% across most IIM’s.
Maybe this will lead to some serious, and much needed soul searching. If the argument is that rising salaries are in some ways related to the “value add” that the institute delivers – then, one has to conclude, that the institute has actually added lower value to the current crop of students. I wonder if the students then entitled for a refund in fees!
The IIM’s seem to suffer from unbridled greed - that has been at the bottom of the current meltdown in the US. No justification can be offered for a 30% increase in fees year-on-year for over a decade (it started well before 2004). Linking fees to salaries ensures that students may need to take loans, and this restricts their ability to explore options of entrepreneurship and of working in socially relevant, but poorly paying jobs. This, when as a public institution, the IIM’s are adequately supported by the State (they have existed for over four decades, and have built their reputations over 3 decades of public support). Operating independence for a public institution cannot be divorced from responsibility to the public and its government. Rather than competing on increasing salaries and costs, it would be more appropriate if the IIM’s focused on creating a management education paradigm suited for the needs of a diverse and uneven economy as India.
The key success factor for the IIM’s has been their ability to draw within their fold, the cream of aspirants – and government ownership, a merit based entrance and low fees have each played a significant role in this. Change one, and the IIM’s will not be the same again. I hope the IIM’s are listening.
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