Sunday, February 27, 2011

Invest Here Or The French Alps: Can Union Budget 2011 Fix ?

Ms Artha Property Real Estate  Services has today advertised luxury apartments starting at  Rs 1 crore (approx $220,000) in today's newspaper. If you live in any of the four or five big cities, you must be reaching for your cheque book. I almost did. Hold on. These properties are not in Gurgaon, Noida, Bandra or Andheri. Actually, perish that thought. These  properties, we are told, happen to be  in the French Alps (Viry). Oh, that's just  10 km from Geneva.

The  luxury apartments advertised range from 470 square feet to 870 square feet + balconies. Of course, 75% finance is available (from a Swiss Bank I would think) at 3.4% interest and monthly EMIs are lower than Rs 20,000. And  Ms Artha Property promises that possession is April 2013. Now that concerns me. But site visits are promised in March, so reckon you can go see for yourself. Which is doing better than many folks I know who bought properties without seeing anything in Mumbai. And they still are'nt seeing anything except dwindling bank balances.

A day before the Finance Minister presents his Union Budget its worth using Ms Artha's advertisement (no ill will towards this enterprising relator) as an indicator of where we stand as an economy. Which is on very weak footing. Wouldn't it be you think, if the Alps are more enticing to buy property in than Andheri, in north Mumbai. Of course you can't live in the Alps and commute to work. But these are trifling details, you would agree. Oh the reasons.  The French are facing their own pressures and like other such economies need investments from outside. Like we are not.

The Twin Canons

We are facing worse pressures thank to the twin canons of inflation of rising asset prices and can't seem to be able to do much.  These two factors  (the rest can focus on the rest) are killing this economy and its people. The first we usually try and respond to, the second we do not, except through some distant monetary measures. Each time, something has happened with the latter, its usually the result of an equally distant development (like a global economic meltdown) or providence or a combination of both. I am waiting to see what it would be this time.

So if there is anything the Union Budget can do, apart from lets say new measures for subsidy targeting, it is to drive the nail into inflation. Can the Union Budget do it ? Perhaps not entirely. Can the Union Budget bring down prices of real estate so that ordinary people can buy houses and there is not such an artificial supply-demand gap that every politician gets into the game as they have been. Perhaps not directly. But it can surely set various  balls rolling.

The first is to signal  monetarily (to the country at large and the Reserve Bank in specific) that interest rates should and will  rise. And rise to a point where some backs will break. Yes it sounds difficult to digest. But we did survive similar phases in the late 1990s. And till date, the problem has always been availability of capital, not the cost of capital. Am not saying the second is not important. And if you, as industry, are still seeking cheaper capital, than try borrowing from where Ms Artha is lining up funds, at 3.4%. And Im only half-kidding.

Cleaning Up The Pipelines

Theother thing is to focus on is declog the pipelines. Lets look at the flow of funds in the system, particularly in public services. There are ideas and committees that are working on this already. The right signalling combined with stringent action will help free up a lot of government funds.  And ensure they reach the right person in the right manner. Technology is offering  fascinating and affordable solutions to these issues that have plagued us for decades.

I would categorise imports as a pipeline problem in some ways. Lowering the tariff barriers and streamlining flows (technology can aid this process with greater precision) will help address some inflationary pressures. Though not all. There are other pipelines that need declogging, including of course availability of real estate. And education. Its interesting what open markets can do in a country. We have over 500 television channels and close to 90 news channels pumping out information (which may be all of us don't want) all day but not enough schools to educate our children or food to feed them. Which we desperately want.

And the problem is not the lack of pipelines. Because they will get created with the right incentives, including appropriate policy. Its about declogging them to ensure that they deliver the goods. That's the only way you wont add additional flight of capital to the problems we already face. Else, it would make more sense to invest in the French Alps and gaze at the mountains than see inflation eating your savings up. Oh and I forgot to add, if you think the Alps are too cold, you could settle for villas in Bali. Ms Artha promises to set you up there too. And its still cheaper than Andheri.




Wednesday, February 23, 2011

What If Oil Hits $200

I remember asking then Finance Minister  and now Union Home Minister P Chidambaram what would happen to India's economy if oil went to $200 a barrel as was being widely predicted towards end 2008. Since it was already $147 a barrel, that figure didn't seem impossible.

Modern history  was of course kinder to us. Not only did oil prices plummet, it brought down everything with it, including the global financial system. Actually, it was the other way round but, as many would argue, though it really does not matter.

Tensions in the middle east have pushed oil prices to $106 a barrel and analysts, I read in some reports, are predicting a return to the $147 regime. Perhaps that what oil speculators are waiting for and in some ways prepared for. The modus operandi is the same, the circumstances are different. This time its Gaddafi we are worried about. Last time it was Wall Street.

Fruits Of Growth

The Government here says the  key priorities for 2011-12 are controlling inflation, protecting the common man from rising food prices and ensuring the poor get a fair share of the  “fruits of growth”. Accordingly we can expect policies to be framed, is what the Business Standard says today. The newspaper also argues for tough moves to bring social equity, including steps like introducing inheritance tax.

I agree. I would add the Corporate Social Responsibility (CSR) contribution to that list. I will also propose a model for doing so in coming days. One I think would best take care of all interests. However, moves  to introduce greater equity by taxing the super rich should be matched with moves like reducing customs duties sharply on those products will help manage inflation.

That may include oil. But  oil is the big bear sitting in the room. And no one  knows  how to start this conversation. The bear has the potential to upset or wreck the best of monetary and fiscal calculations. And there are not too many of those going around in any case, given how we've been struggling with inflation for the last year or so.

So What Happens Now ?

So the situation is ripe for two kinds of outcomes. The first is that things get progressively worse till some distant  point - in many countries this is the point citizens spill out on the  streets. The second is that the system will give way because of the already accumulated heat of overheating.

The last time this happened (guess what, just three years ago), the system gave way. Wall Street collapsed, the banking system followed. And then froze solid. And of course asset prices of all types began falling. Unfortunately this period (and I say that carefully)  did not last long enough in countres like India.

Will the system give way? Possible, but unlikely at the global level because many systems (think Europe) have already given way ! What about India ? Well, India is more precariously poised because it tends to usually be like the frog that gets boiled without actually getting fully boiled. No, not in oil, in case you thought I was stretching the pun here.

The FM's Response

Fact is that oil prices are one of the many problems we face. And the one we have least control over. Fighting inflation requires some stern wielding of the monetary stick. And the time to raise or tighten interest rates is right now. We  should stop running from that. We need some strong fiscal measures as well, including managing tariffs. But that is not so much a matter of will.

And of course, the $200 question that I posed to the  Finance Minister's. Well, he admitted that he did not have an answer. Except to say that that things would get worse if prices went up. It struck me  he instinctively knew the economic system was strained badly  and would give way. Perhaps the  reasons were not so apparent. I am betting the same thing today.

Sunday, February 20, 2011

What The PM Should Have Done

I read, from the weekend newspapers, that a 90-minute interaction between the prime minister and television journalists last week didn't go too well for the former. Going by reports, Prime Minister Manmohan Singh  ducked questions and was not assertive enough. Though, as has  been amply pointed out by the few who know him and many who do not, I have never known him to be assertive.

The problem lies elsewhere. When someone invites you to an interaction of this nature, you presume he or she has a message to deliver. A politician in power has the luxury, some might say, of calling you over and then responding to questions that are uppermost on the mind, your's  mostly rather than his or hers.  Of course, politicians know only too well that media tends to pounce on them on issues uppermost on their  mind - the  agenda be damned.

So, its a Catch 22 of sorts. Do you, the politician, come prepared with a  thought out,  strategically important, introductory message that allows you to set the agenda and then mould and massage the subsequent discussions. Or should you wait for em to pile em. I have no  specific experience on the other side, ie the politicians, but have seen sufficient interactions which have gone well or awry because of what the starting point was.

So I would still argue  the best position would be where you seem to have arrived with a tactical agenda. And then talk about what's going on in the real world around us.  How about a few real-life narratives of a  billion people  going about their lives oblivious to the 2G Scams, in all their struggles and happiness. Fighting, succeeding  despite everything. Sometimes not. Share their stories, inspire us.  Very few will  accuse you of being defensive then.

10% Growth ?

Will India grow at 10% ? I know this is one of those questions that will mesmerise us till we do it ? I suspect when we do hit that number, we will be facing far too many problems as an economy to celebrate.  As we already are. Inflation is the biggest bother. I read the views of almost a dozen economists in the last few days on the matter to safely conclude that they have no answer.  Most of them, thankfully, admit as much.

Inflation is one of those things you cannot fix unless you have equal control over the factors of money flow and supply. And of course have summoned the will to play with the levers. There lies the problem. Our ability, traditional and present, to move the levers is limited.  At least in a hurry. Increase interest rates and the growth hawks will scream. Lower interest rates and inflation and asset prices will blast through the roof. In my view, that's already happened. Though not everyone will have the same view.

The solution though is precisely that. To the extent that inflation is a monetary problem, there is no choice but to increase interest rates further. Can we realistically fix the supply side problem, whether in real estate or in foodgrain. Maybe, maybe not - yes I know onion prices have dropped from Rs 65 to Rs 23 per kg, or so. Frankly, we  are better off manipulating the levers we can. The other solution is of course much greater efficiency in the economy, in production and distribution of products and services as well as making the citizen more `visible' to Government subsidies, direct and indirect. So we may or may not hit the 10% mark. But we will be better off.

Friday, February 18, 2011

Indian Venture Capital: Funding The Billions

Luis Miranda, presently Chairman of IDFC Equity and Sumir Chadha, presently MD of Sequoia Capital are veteran Indian venture capitalists. Both have been around for more than a decade. Both have `discovered' and nurtured entrepreneurs in different spaces. Luis can claim some credit for the initial success of infrastructure groups like GMR and Sumir, the likes of Cafe Coffee Day, JustDial and Carzonrent..which tells you something about the diversity.

Both were part of a panel discussion I was moderating last night at the VC Circle's  Limited Partners Summit  at the JW Marriott in Mumbai. We went through a brief history of  investing, including the challenges posed by  volatile markets and staying the course. Both admitted that the learnings had been tremendous, investments had gone wrong as had, more importantly, their judgement of some of the entrepreneurs behind  the ventures. The good news was that there seemed to be more rights than wrongs.

The discussion was wide ranging but let me bring out one or two points. One question often asked of venture capitalists is about their ability to find or create the truly innovative start-up, read the Yahoo or Google of India. I posed this to Luis and Sumir and was not surprised with the answers. For one, its now increasingly clear that innovation in India will not translate into startups like Google. At least for a while. The real innovation will happen in companies and ventures that are creating appropriate products and services for the Indian market market and consumer.

Digital Dividend
Sumir quoted the example of Star Health & Insurance which his firm Sequoia recently invested in. I am familiar with Star, its a good example of how firms in India are applying cutting edge information technology and processes to solve the problems of the poorest. In the Kalaignar Insurance Scheme, Star provides cashless insurance protection against a host of medical contingencies requiring surgery and hospitalisation. The scheme, which is government funded and aimed at `below poverty line' or BPL residents of Tamil Nadu covers some 352 surgical procedures. And some 40 million individuals are covered.

The part thats really exciting about this project is that its entirely digital. Patient records, interactions, transactions, everything, is oneline. Which means the poorest of the poor in this country in some states are enjoying facilities that citizens of many developed countries can only dream of. Firms like  Star are not just innovating new and efficient cost models using technology but also showing how the bottom of the pyramid effect can be served profitably. Not surprisingly, venture capital is headed there.

Luis had similar thoughts about the innovation in funding and structuring infrastructure projects. And I agree.  The gaps are so huge that there is enough to do here. By all means think of the next Google and Facebook if you can. Chances are you will be better positioned to do it if you were in Stanford or Harvard. Or maybe even in India in coming years. But the exciting innovation in India will be about finding solutions to the problems faced by a billion people.

The Next Decade

Leading on from the innovation argument, there was  some discussion on the next decade of venture capital/private equity. The bottomline is that everyone is considerably bullish about India and investment opportunities. And there are newer focus areas like health insurance, education, infrastructure and products and services focussed on the consumption side. For example, Luis' firm has invested in Manipal Health Systems which manages 11 hospitals and over 1,400 beds in south India. I would consider this innovative too, because  more such firms, in areas like education and health, would be encouraged to set up and raise capital. And also think of raising their standards and offerings.

Several stalwarts of the Indian VC industry, including Luis and Sumer as it happens, are moving on.  Luis is off to the public policy space and Sumir to start a public markets venture, which is more of picking stocks than seeding companies that may go public some day. Is this is a comment on the state of affairs in some way ? Both disagreed, saying the industry was strong and would continue to grow. Their own life cycles were turning, they pointed out. I wouldn't quarrel with that !

The question on the future was answered in a different way. I met Atish Babu and Jinesh Shah from Omnivore Capital. They call themselves an  "early stage venture capital fund investing in agricultural technology startups in India". Atish told me they were  back entrepreneurs  innovating solutions to improve agricultural productivity and sustainability. Their knowledge and understanding of rural Indian opportunities was strong and growing as I could see. They already had plans of what they could and not do in this market. And there are many more Omnivores out there, including Omidyar Capital, whose interest overlap somewhat. The next decade is evidently about the billions, not the millions.

Wednesday, February 16, 2011

Financial Inclusion Begins @Home

Out of personal curiousity and professional interest, I am constantly in conversation with the banking and financial system  trying to understand how they can (and will) play a greater role in spreading financial inclusion in India. While its fairly clear that financial inclusion does not end with opening a bank account, its a very important start because close to 70% of India's population does not even have bank accounts.

The Ministry of Finance, along with the Indian Banks Association has just  launched the  Swabhimaan initiative, aimed at taking banking to some 73,000 villages having a population of 2,000 by March 2012. Electronic banking (at least technologically) is now  accessible by most people in and parts of India. Combine this with the mobility of identity through the Unique Identitification Authority of India (UIDAIs) Aadhaar project and  someone who has been out of the system for all his or her life will now become part of it. And there are other benefits, like subsidy targeting which I won't  get into here.

If close to 70%  the population does not have access to banking facilities, it must stand to reason that a good part of this 70% are in urban India as well. The good news is that we are connected to the problem (and the solution) right in our homes. Its actually quite simple to establish. Many of us living in cities and towns in India employ domestic help in the form of maids and cooks, driver for the car and so on. Ask them whether they or any of their family members have bank accounts. The answer, in 3 out of 4 or mostly 4 out of 4 cases is a plain No.

Proof Of  Identity

The reason they don't have bank accounts is not because they don't want to. Its because they don't have the right papers to prove to the bank they, well, exist.  The interesting (and sad) part of this is this is the case whether they hail from a village in a distant state or a village 40 km from a city like Mumbai or Delhi. Banks as part of their Know Your Customer (KYC) will demand proof of identity and proof of residence. Forget the working migrant class, even those of us who rent homes find it next to impossible to produce the right proof of residence.

The  UIDAI's Aadhaar will partly change this. The Government (via the Ministry of Finance and the Reserve Bank) has directed banks to accept the Aadhaar as sufficient KYC for opening `small accounts' or no-frill accounts. So the enablers are falling into place including the fact that most states have begun rolling out Aadhaar (1.6 million + as of this morning). But the biggest enabler is you and me. Instead of handing out cash to our domestic help, we should be telling them and helping them to open bank accounts. One way of doing this is to obviously ask them to get the UID first. Second is to actually help them go and open bank accounts.

The third is  to pay electronically (as far as possible). Its a headache reducer for both parties and a cashless way of existence has other benefits as well. This is the beginning. The next thing would be to bring in other small aspects of financial inclusion such as micro insurance schemes and/or pension schemes. Life Insurance Corporation (LICs) Jeevan Madhur and Jeevan Mangal are examples of such schemes. There are similar initiatives in micro pensions as well. I suspect that getting a micro insurance or pension scheme may face some of the identity challenges a la  opening bank accounts did. But this is getting rapidly ironed out.

FI@Home, A Force Multiplier

The multiplier effect of starting financial inclusion at and from home can be considerable. Most urban workers remit money to villages and small towns. A bank account on this end will incentivise the opening of one on the other end as well. So, if the two or three people who work in your home open accounts, its another three or four in their families plus a few more. Its not about the numbers though, its about the contribution that you and I can make through simple steps.

So, as March 1 comes closer, remember to start talking to your domestic help. Tell them about the benefits of opening bank accounts and how you might be willing to pay a small part towards insurance and pension schemes as well. Encourage them to adopt banking and savings as  a way of life. And that from now on you will deposit directly into their bank accounts. I bet you they will thank you for this. And don't forget, spread  the good word to all your friends and acquaintances too  !

Tuesday, February 15, 2011

China Beats India On Black Money And Yet..

An economist from Washington-based think tank Global Financial Integrity (GFI) quoted in the Business Standard today says India lost $213 billion in illegal flow of money out of the country between 1948 and 2008. That would presently be worth $462 billion, assuming standard rates of return - all money should earn returns, shouldn't it  ? The other oft-quoted figure for black money stashed overseas  is $1.4 trillion.

The economist, Dev Kar, has an interesting point. He says that faster rates of growth in the post reform period have not been inclusive in that the income distribution is more skewed today, which in turn has driven illicit flows from the country. Thus, the result does not hold in the pre-reform period when growth rates were low and income distribution was more equitable.

This is an interesting point. And not surprising in some ways. All you have to look at China which has grown at 10% or thereabouts for some 30 years ! And leads the league tables for illicit outflows. The reasons for the outflows are very similar to India and, I reckon, quite boring to get into repeatedly- if you really want to know, its bribery, theft and kickbacks. To get a sense of the magnitude, I reproduce figures from the Ford Foundation funded GFI, which studied illicit flows from 2000-2008.

CountryUSD $ BillionRank in Asia 

Incidentally, Russia ($427 bn), Mexico ($416 bn), Saudi Arabia ($302 bn) are also ahead of India which is now ranked 15th among developing countries - if its any  comfort to you, the reader of this blog. Also, India slipped in the ranks because, according to the GFI, the oil exporting countries, shot ahead. I  hope we don't make up with as a `mineral resource' exporting country.

To me the big challenge today is equitable distribution. Fact is we would all care less about black money (and dismiss it as a tax problem)  if there was a greater sense of equitable distribution. Here, China is better off than India -  it has greater equitable distribution despite higher illicit outflows. How do you measure the first part  ? Well, you could use standard metrics, like absolute poverty, access to education, healthcare, child mortality and so on.

Which brings us to a fundamental point on quality of governance. Countries like China, or for that matter, Malaysia and Indonesia evidently deliver better governance to their citizens than India does. In India, we are grappling with intensifying corruption coupled with weak governance. No prizes for guessing. Its the same few people who we depend on and let us down both ways.

Good Governance, Bad Folks

In China, my sense is that these two sets do not necessarily or always overlap. The proportion of honest people delivering good governance seems higher than those who are not. And its possible even dishonest people are delivering good governance. This is often quoted by developmental institutions as being the classic South East Asia paradigm - not including Singapore.

The curse of rapid and unbridled growth is precisely the skew that causes, among other things, illicit outflows. Of course illicit outflows is only one manifestation of inequitable economic growth. Outflows or not, the damage to the internal economy and society can be high, as organisations like GFI also argue.  The only solution is to get a hang of things and clean up the system as far as possible.

In some ways, this is tantamount to  accepting that 20 years have gone by without our wrapping our arms around the problems thrown up by sudden growth. Its true. On the other hand, its  never too late. One way to view the noise presently being generated through the multiple corruption scandals coming to light is precisely that...a giant mop trying hard to clean up a dirty floor that has  been untouched for decades.

Monday, February 14, 2011

China Railway Comes Closer, To India

Three months ago, I argued in an article that China's railway lines were inching towards the Indian border. The argument was of course based on reports of China's own plans to expand its railway network in the Tibet.

I also argued that towns like Tibetan towns like Nyangtri  (Nyingchi)  - which will eventually link to Lhasa - already boasted  swank airports. So, infrastructure investment had already flowed liberally into the region. The  railway line was following the initial thrust, not preceding, as would historically have been the case.

The Indian Express today reports with greater finality that China is to extend its Tibet railway network into the Chumbi valley area, next to Sikkim and the Siliguri corridor. The newspaper says the  China's Railway Ministry latest map shows lines extending from Lhasa to  Zangmu on the Nepal border, to eventually extend into Nepal and even Kathmandu. Another line will branch out midway at Shigatse, and end up at Yadong, which is on the other side of Sikkim.

Trading Places

As I pointed out earlier, there are sound economic benefits in this linkages for trade on both sides of the Indo-China border. Traders in Sikim have hoped that for years that a road or rail link with China via the Nathu La pass would accelerate trade. For Tibet, the port of Kolkata is closer than Tianjin (1,200 km versus 5,000 km).

India is also concerned about such developments from a strategic-defense perspective. Given history, that cannot and must not be ignored. The fact however remains that the region is in crying need of infrastructure. I recently travelled to Dibrugarh, in Assam, which is perhaps the largest, eastern-most town in India...incidentally, the longitudinal line that passes through Dibrugarh  touches Banda Aceh (1.5 hours ahead) in Indonesia down south.

I also drove from Jorhat to Dibrugarh on National Highway 37. One way of looking at it is that the infrastructure in this region is similar to most states in India. And why hope for anything better ? The other is to see China's moves on the other side of the border and use the economic, rather than the military rationale to change things.

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