European Union (EU) disintegration : Challenges and perspectives.

The recent spike in the Rupee and the nonchalant behavior of Indians and specially the incumbent government and the RBI sent me thinking about the other currencies which would have gone the same way down…

In general, the last year has seen the dollar rise in comparison to almost all the currencies.
This presents us with two simple alternatives:
1. The US economy is on a recovery path with a faster growth than 3-5%, which given the size of US is impossible.
2. The Global economies are losing investor confidence in all economies and are looking at securing the most stable and strongest currency in wake of an economic aftermath, the US $.

Since the first option is out of question. Let’s look at the second one.

Trying to look each of these currencies will take me down the path of yet another enormous article. So let me look at them in a regional bloc manner and categorically reach to the smaller ones, starting with the Euro, Ruble, and then Rupee.

Euro will have to be looked as a variable directly proportional to European Union (EU). Currently, EU is mired with problems starting from fiscal to ideological to diplomatic perspectives. The tensions of 2012 summer of Euro disintegration has been recently brought to fore by the Dutch finance minister. What brings us to the brink of such a situation ?

The decision drivers which are gunning for the disintegration are multifarious. The reasons and the triggers for the Euro weakening have many theories to be earmarked with. It all started around the 2008 financial turmoil with the fall of Lehman Brothers and since then the EU and euro has been in crisis. The crisis exposed each of the member countries financial stability and thus weaker countries were left to fend for themselves. The stronger member economies such as Germany, France, UK were scared to bail out the weaker economies as they risked being dragged down financially. This brought down the level of confidence in the union.

The EU could never unify all its member states and bind them to a common agenda of fiscal and monetary prudence. The member countries are always scattered and differentiated with the union policies. This never aided the EU to come to terms hindering their diplomatic and economic trade stance with other regional blocks.

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The euro member countries have been also been dealing with a lot of internal political instability. Italy’s democracy has been challenged by Beppe Grillo “Movimento 5 stelle” and its wave of populism. His “La Repubblica” advertisement in 2005 called for the resignation of the then Italian Bank governor over the banking scandal. Later, he rocked the Italian political scenario with his “Operation Clean Parliament”. His “vaffanculo” rally was attended by 2 million Italians in 2007. Greek has seen its own share from Alexis Tsipras of SYRIZA, revolting against the austerity agenda. Viktor Orban’s landslide win in recent Hungarian elections bring a more pragmatic thought to the way the populism is molding the societal core. France’s National Front and Hungary’s Jobbik present perspectives which should not be overlooked by EU.

What may come out of these movements could be either good or bad for the Euro/ Europe/ the member countries in that matter. That's something which time shall scribe.
I am right now being unbiased and trying to list what could affect the European Union (Euro).

The EU has two options:
i.                    They should let loose some of the weaker laggards, lose its initial agenda of European unification and continue as a closed stronger and focused.
ii.                  Nibble on time and hope that the EU members come together under a covenant and do away with all the fiscal and economic ideological disparities in the region.

While EU looks at the first option, it risks losing its character and essence. The choice is fraught with the making more enemies and seclusion of trade with the smaller and weaker economies and inviting distrust and enmity with the neighbors.

The second option is more to do with buying time and sticking together hoping that one day all the nuts and bolts (members) of the EU region start functioning in a more coherent manner… One day…

To be continued in the next blog with the core performance reasons for the Euro fall …

Power should not be subsidized

I would like to Thank the readers of the blog and specially people from my workplace. Your encouragement means a lot to me.

An artista always needs patrons of his art, a writer needs its readers, a performer its admirers, and an extortionate economic policy its subsidies.

A half page ad in Deccan Chronicle about the recent govt scheme jointly floated by ESSL (Energy Efficiency Services Ltd.) and local Discoms caught my eye in a train journey returning from home.

Since you do not have much to do in a train journey, I floated the idea for discussion to my co-travelers including a govt. employee, techie, businessman, and two MBA lads and a cynic (me).

The Issue: In order to fuel government's plan to boost energy efficiency, ESSL (Energy Efficiency Services Ltd.) and local Discoms are going to offer LED bulbs which cost Rs. 400 as an exchange for 2 incandescent bulbs costing Rs. 10 each to every household under the DELP scheme.

More than the policy what shocked me is the ill-informed and whimsical nature of opinions which we have as citizens to the state of affairs around us. Interestingly, these opinions differ so vastly when you change the strata of their economic and social exposure. That makes for another story some other time.

I am totally supportive of the intent of the policy but am in ardent opposition with the implementation vision of the policy. Let me explain why.

The govt decides to subsidize Rs. 400 per bulb in order to increase the efficiency of energy used per capita by promoting the usage of the LED bulbs, which is by far not a commodity which can be clubbed as a public utility good. So the government is spending the taxpayer’s money to allot a commodity which can be termed as a good of private choice.

This policy is similar to an instance where the government plans to spend money to subsidize the sale of 5 star rated air conditioners and offer it at 90% discount for the public.

I do not doubt the intent and but the benefit transfer to the people who would be the benefactors of this scheme. The policy flaw is in the implementation that should fail as the benefit of the subsidy would be transferred to the wrong class of people.

The question we should be asking is who would be the direct benefactors of the scheme and by subsidizing a public good, is the government not meddling with the market forces which are at play?

Through some statistics of the Discoms, it was estimated that 4 lakhs LED bulbs working at a 100% uptime could transfer a benefit of 191 million units in a year, i.e., roughly translated to a cost benefit of 275 million (as per current Andhra Pradesh rate of 1.45/ unit).

From economic and moralistic standpoint energy efficiency is one golden deer which we must pursue but importantly we should not lose the sight of implications and aftermaths the chase could lead to.

Better energy efficiency is a need of the hour for power undermined country like ours.

We must not forget that whole pandemonium of the show depends upon the uptime usage of the LED and the quantum of discount rate viz-a-viz the market price. The uptime of bulbs in India are hardly more than 6-8 hours which makes the time period for an 100% uptime extend by 3x.

India should be focusing on understanding the interplay of power pricing and the way it impacts its consumers. As long as the consumer feels that power is cheap and doesn’t take real chunk of consumer’s earning. It will be frittered away. This anomaly can be balanced by inducing carbon pricing in energy subsectors of consumption and energy usage, both in commercial as well as residential. Globally, we are slowly approaching the age of annulling all the externalities involved in the energy sector. Its time India should take this up seriously. The moment these factors start kicking in the prices of energy consumption will go up, leading up to the purchases of energy efficient equipment.

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Interestingly, we are only looking for a solution at the user end of the problem. Indian government should start addressing issues at the power generation, transportation and transfer level. We need to invest in upgrading our infrastructure by notches to match the international standards. India’s transmission facilities infrastructures are eons behind in terms of zero loss energy transmission capabilities and the new state of the art smart grid concepts. The 11^th 5 year plan intended to 62,000 MW capacity generation plan, but ended up 34,500 MW now put this in perspective of Duke Energy of US, which alone generates 58,000 MW or an EDF of France, ranked 4^th in utility companies of the world, whose 95.9 percent of the electricity output is CO2-free.

The economy and more importantly, the people should come forward and agree to take the issue head on. They should not be incentivized to use or replace bulbs and feel good about saving power. They should understand that the things in the world which are taken for granted are not meant to be.

The government should realize that the greatest cash cow of reforms is not always with the consumers but also at the generation and transmission level. And O’ boy, I haven’t started to talk about the dismal and appalling natural liquefied gas infrastructure. In the interest of reader’s attention, let’s make it another story. :)

The government should look at a level of parity to understand that the rates of return on its investment on the household sector of incentivizing the bulbs is so stark than the ROI it can experience in overhauling its dilapidated infrastructure. We have aging countries such as Japan who are ready to give out loans at throwaway rates, which can overhaul our infrastructure in 5-7 years. Given the interest which the world is showing in India, we should scoop the advantage of resorting to an FDI policy with a price control mechanisms in the power sector and cap the amount of revenues or investment a company could take out of the country for a period of 20 or 25 years.

A humble request to the government, Please do not give easy (cheap) power to people who do not understand the inherent value of it.

However, I would not like to end the piece without adding some positive facts about LED bulbs, to induce the corporates and the residential users to shift to LED.... So watch out for my next piece.

The manipulation of "The Dollar". A lesson for superpower administration.

One of the well known writers in the world of finance, argued that the recent outbreak of currency wars are the fault of the US. Now in this piece, I will put my best foot forward and try and analyse the situation. I am not brandishing my knife at anyone but am just putting down my 10 years of Global Markets understanding.

Lets talk about the most talked country's one of the most untalked topics.

Financially, the usage of Dollar has been executed with such perfection, so as to create a web where none of the economies can actually be detached from the green currency. Recently, it used one of its old tricks, Fed’s Quantitative Easing and other monetary growth programs create huge amounts of Dollars, and the majority of itto be exported to emerging market countries, like India in the form of loans and investments for development. The excess inflow puts upward pressure on their currencies, and the foreign speculators made speculative profit at the expense of domestic exporters. Obama's India visit would see some more of such plans being announced. Keep Watching...

The majority of newly printed money has indeed been shifted to emerging markets, where it enjoys one of the best returns and the highest potential for appreciation. The current economic and investing climate in the US is not as strong as in India. Indeed, this is why the (first) Quantitative Easing program was not very successful, and why the Fed has proposed a second round. While there is a bit of a chicken-and-egg story in the unvieling (does economic growth drive investing, or do investors drive economic growth?). US is harping these measures to propel growth in US,but if you watch minutely, the current capital flow trends suggest that any additional quantitative easing will also be felt primarily in emerging markets, rather than in the US.

While the ineffective of this measure is well-understood for the US investing community, a strong case is made for investing in emerging markets. Emerging market economies like (BRIC) are individually and collectively more robust, with faster growth and lower-debt than their industrialized counterparts in Europe and America.

The lucrativeness of these countries is driving speculative capital into emerging markets even though a critical currency appreciation of about 30% has already taken place and the asset bubbles that may be forming in their financial markets suggests that their assets and currencies are still undervalued. Please hold your horses, that does not mean the markets are perfect, but instead the speculators think that there is still money to be made in the situation. On the supply side, exchanges for the emerging market currency for Dollars (and Euros and Pounds and Yen) must necessarily accept the exchange rate they are offered. The rationale of the exchange rate is not decided from the fact that it is agreeable to all parties but because of the equilibrium it maintains in the demand and supply equation of world currency exchange.

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This occurrence unfairly penalizes the state of countries like India, whose economy is dependent on the export sector to drive growth. The situation actually proves that economies of the third world have no comparative advantage in the exports, they happen to produce and export. Low costs and loose laws are the only competitive advantage on which the third world countries should be dependent upon to grow their export sectors in spite of the currency appreciation phenomenon. Japan and Germany are an perfect example. They have recorded trade surpluses continuously for decades, in spite of the rising Euro and Yen for decades. But again you would ask me to explain India's Indian Rupee, and the answer is dead political will to deregulate laws and export shackles and too an extent sub-standard image in terms of product quality and marketing. I should do justice and give this subject its due space in form of another post.

The problem is that everyone benefits (in the short term) from the fundamental misalignment's in currency markets. Traders like to mock purchasing power parity, but over the long-term, this is what drives exchange rates. Adjusting for taxes, laws, and other peculiarities which distinguish one economy from another, prices in countries at comparable stages of development should converge over the long-term. You can see from The Economist’s Big Mac Index that this is largely the case. As emerging market economies develop, their prices will gradually rise both absolutely (due to inflation) and relatively (when measured against other currencies).

more to continue...

Global Manufacturing and Make in India magic

Too much intrigrued by the brouhaha of Make in India, I have been following the socio-political scenario globally and every political institution be it in the struggling European clusters, labour intensive Asian behemoths or in the uber mature US states, is rightfully allotting significant importance to one critical data to measure the political and economic success of the countries. Employment data. Rightfully so, the need to create jobs has come out as one of the paramount drivers to satiate the public outcry for progress and development.

“In a century, once, the youth gets to choose between respectable competence and ways of tainted wealth. One who is honorable and dedicated, holds the single element of success.”
Leadership of even self-sufficient countries, such as the Saudi Arabia which has been maintaining significant positive balance of payments for eons now has stressed the need to pursue the goal of job creation in right earnest. The creation of job is not only the creation of money and constructive chain of reactions but also a tool for countries such as India and China to keep its teeming youth’s energy constructively challenged in building a nation.

Since the industrial revolution, Countries have looked at manufacturing sector to create jobs through the government investment and mediation. It is the easiest and most plausible sector where the government through its investment can jumpstart the job creation process and see visible results from Day 1. It makes sense for countries like India and China, since they have such a huge demanding population coupled with the cheap manpower to give me the cost competitive edge.

The other side of the scale is also tipped as economic demand theory rules across. As more scope is presented so is the indulgence of the economies. The room for export is increasingly getting crowded and limited as more countries jump into the manufacturing bandwagon. Thus forcing countries to start leveraging their competitive advantage factors to attract investment and increase its product marketability in the global arena.

Russia, Latin American countries such as Ecuador, Argentina, Peru, Brazil and Middle East countries such as Iraq, Saudi Arabia and Israel leverage the wealth from their natural resources such as oil and gas and minerals. Scandinavian and Germans use their highly skilled manpower and some like India and China are using their access to huge demand of consumption and cheap manpower.

However, a special mention goes for countries such as Singapore and Dubai, who have built their prowess of people and propagating their efficient governance as a magnet for investments.

India has been failing miserably in these counts, it has neither been able to leverage its huge pool of intellectual capital nor has it been able to attract investors propagating its huge scope of internal consumption market.

Manufacturing in India has been trending on wrong path with no steering from the government. Indian made products can be only served to the purpose of internal consumption since it has limited scope of exports. India has to first fix the competitive disadvantages such as abysmal power cost, high capital cost, and crippled infrastructure from a governance and utilities standpoint and fill the void of superior technology in manufacturing. India needs to primarily work on making the domestic market lucrative for manufacturing sector, greatly for SMEs in terms of scale, profitability and structured governance.

The irony of the matter is itself evident when India is trying to position itself to the world as one of the largest consumption market to investors to look and invest in India but we are trying to fix the export sector more than developing the internal market dynamics of the country.

India has to first work on plugging its loops in the low quality product standards more so from changing the global perspective as they view Indian made products. From the sheer number which we boast of, the manufacturing sector would hardly require to export if it satiates the internal demand of 1/5 of the world’s population.
The government from a longer term perspective should look at developing co-manufacturing and knowledge sharing agreements with the Germans and the Scandinavian economies at the corporate level so as to develop and enable skill transfer to bring the Indian workforce at par with the global quality standards. It should also initiate educational and curriculum changes at the IITs and NITs and encourage steps and measures such as student transfers and invite lecturers and industry doyens of the advanced economies so as to develop the nubile skills at its germination.

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Indian government should look at developing the sector as a hub for developing homogenous product market, which can leverage the huge manpower to provide scale. Sure it’s a utopian idea, given the kind of fragmented political power centers are emerging at regional level. The idea of uniform taxation, standards of product manufacture, uniform regulations and laws, and inter-state movement across India would take an impossible convincing skills and humungous political will to be implemented.

The next step should be our focus on facilitating innovative technology. India has given birth to the disruptiveness, ‘Jugaad’ but it has failed to come up with new invention of core technology. Since long we have been dependent on the Koreans and the Japanese to bring forth inventions and Indians have been successful in replicating it by tinkering around and customizing it to Indian needs. We have been awfully brilliant in reverse engineering the products and bring forth the cheaper version of everything available in the market but shamefully none as a first except the Nano (being a fan of how it was developed, I had to mention it).

Oh I hear a snigger there, well, it would seem good to add, that a need of an innovative product begins with an understanding of market need. Importantly, the need should be fulfilled by precise delivery of the product, sieved through financial value, albeit, with a pinch of social brand value (Hope, you are happy egomaniacs).

Once the need assessment is set right, the product is a cakewalk. Today, the value emerges is in realizing the product outlay right and tailor it to suit the need to hit the sweet spot, e.g., Apple.

It is evident that judgement plays a crucial part in evolution of innovation and as always failures will form a part of the learning and growth. If we are to encourage innovation, then we also need to embrace failures and even celebrate them. In India culture, we hardly respect failures and we go a step ahead and ridicule them. This typical mindset will have to change to propel manufacturing ahead in India. We should look at encourage the innovation and start looking at valuing intellectual property.

SARFAESI Act, 2002 and the Indian Banking Industry.

Last couple of weeks has been good reading time going through the SARFAESI Act of 2002.

SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act was formed for the banking sector (including financial institutions) to allow them to seize underlying security such as hypothecated, mortgaged and pledged collaterals, without the court's intervention in secured loans category. This is really refreshing as now banks can focus on what they were meant to do rather than focusing on building distressed asset teams or in other cases were outsourcing it to specialized firms. A great relief for the PSU banks as they never would have amassed the toughness for the part.

Just to look at the numbers the stressed assets at banks (NPAs + restructured loans) had increased from Rs. 0.7 trillion in 2003 to Rs. 5.3 trillion in 2013. Banketing the asset sale to ARCs was not helping the cause. The AMCs (Asset Reconstruction Companies) were not helping much than just being a way of government recapitalization to reflect on the bank's balance sheets (I hope we were not thinking to fulfill the Basel III norms through it, pun intended)

The ARCs were crippled by too many unnecessary and myopic regulations, hail the RBI and the financial lawmakers :P . Oh just for the record, Indians are known to spoil the broth by bringing in too many cooks… All  the time  without exception, especially with Government machinery works. The banks should have never delved into peeking what the ARCs do with the sold distressed assets. The system should have let the ARCs function independently and not mire it with short-sighted RBI over regulations.

The manner in which the sales of the distressed NPA's to the banks were executed was opening up the wounds formed from the banks frailty, majorly Public Sector ones.

Predominantly, the banking system has norms driven more so attributed to regulatory compliances rather than risk assessment, simple example being even though an asset getting redundant and after being overdue on for 3 months period is declared as non-performing, the law lets the bank provision the loss amount across for 4 annual balance sheets just delaying the booking it in the balance sheets.

However, in reality when we effect a sale of the assets then we book the loss upfront for the year. This has lead the banks to play smart and hold on to the assets on their balance sheet till the book value is optimal to sell the asset. The ARCs do not get the asset till they have nothing left to salvage anything as value. The ARCs were doomed and this actually send the ARC industry to cripple away.

Ideally, the banking system should look at bad assets sale exercise in a more commercial viable approach and not just for salvaging lost pride for meagre cash, which at times don’t care of the transaction cost of the deal. We need to act upon some issues such as bringing in rigor (forgive my American spell errors) for the provisioning rules for the NPA.

We should be immediately condemn the shortsighted nature RBI/ of the 2 year time frame given to the CEO's of the PSU's. Every CEO just focusses on trying to not be in any bad news (Sale of NPAs) and play the musical chair game with his/her successors. Their major is just to avoid any dent in the balance sheet due to sale of NPAs.

The other reason for the dismal performance is the debt recovery tribunals (DRTs) and the process errors in the bankruptcy process. The outstanding amount for the DRTs has been hovering around the 15% recovery in the last two years. The SARFAESI Act didn't help the cause and push the number merely by another 5-6%. Restructuring these ARCs is still a laborious and time taking one, which calls for bringing in professional skills and long term financing, both of which ARCs may not currently possess. Given the time and cost involved in this type of restructuring, only NPAs with very high recovery potential will be selected for this type of resolution.

Oh the rabbit hole keeps on getting deeper …..

RBI please bring some political will to reign in some sense about the Acts or recruit better people to effect loopless change.

Conundrum of Egypt - Turbulence and Rearing of Growth.

Abriged Except of my study:

I have been recently intrigued by Egyptian economy including the aftermath the economy went under, the dynamics of the interplay of the military government and the appointment of the new government. It was an interesting affair for me as it was one of the first in history where an economy of 86 million people with a GDP of USD 576 billion and a per capita income of USD 6,800 would go through a phase like this.

Looking through the statistical data, one would just fall in love with the behavior of the policy and non-policy matters when run through a Bayesian model.

Egyptian monetary policy has been focusing on stabilizing the price of the exchange rate which were critical to keep the interest of the international investment community afloat. Egypt has been on an economic trajectory very much similar to a country which I believe to understand in and out, India (considering this is my blog, have the freedom to say so :P).
Both the countries have been trying to control or rather balance the equation of raising foreign competitiveness, increasing the economy with flush income growth and promoting exports. The one divergence which they both were experiencing was the ability to infuse confidence of the larger countries on their own national currencies. India didn’t do well with a nonchalant attitude on where it exchange rates went to, compared to a Egyptian economy which were on their feet to guard its exchange rates including the build up to the turbulent times before the Crisis and thereafter.
What did the undoing for the Egyptian economy was the diverse price distortions it has experienced for decades, fortunately, the realization for the stakeholders of the economy about the distortion will bring about a relative price corrections which will help in the smoothening the transition and helping in formulating a mature social market economy.

We can divide the whole Egyptian embroglio into four stages:

1.      The build up to the monetary infusion (2003).

2.      The Interbanking exchange rate mechanism.(2005-2007)

3.      The Egyptian Crisis and Mubarak Government fiscal and monetary policy (2004-2009).

4.      The Recovery path stage after the Crisis. (2009-2014)

…..