Theory of Votebank Politics

Indian economy has lost momentum and now even 6% growth looks doubtful. How does one explain this kind of situation arising from an expected 9-10% growth. I ascribe this to VoteBank politics and my analysis goes as follows:

Congress is anti-growth as growth will eliminate poverty. Elimination of poverty will not allow it to practice votebank politics and act as Messiah of the poor, backward and minorities. It had to put brakes on fast growing economy and also make sure that the fiscal situation worsens, surest way to keep country poor and backward.

It therefore unleashed Jairam Ramesh, an intellectual and allowed him free hand in halting all the projects that were going on. A politician would have found ways and means to let the projects continue and required compliance on a forward basis. Not the intellectual minister. For him it is either black or white or as he prefers to call it - go or no go. Once Jairam Ramesh managed to stop several large projects and created the nervousness amongst industrialists, he was moved to another ministry to carry out even more damages (though ostensible posture was he was being shifted as a punishment). And lo and behold, we had the Land Acquisition Bill unleashed on us, which required farmers to be paid 6 times the market value of land. So Jairam Ramesh first stopped all ongoing projects, then ensured no new projects can be launched since land acquisition will become impossible. Agenda 1 of putting brakes on fast growing economy achieved without people/industrialists realising what hit them.

Then comes the Agenda 2 of ruining the fiscal situation. High crude prices and refusal to let diesel prices be raised helped achieve this Agenda to a large extent. However to make sure that this Agenda is not derailed, Congress came up with the brilliant idea of Food Security Bill. This will ensure a huge burden on exchequer, offer opportunities to middlemen to pilfer the treasury of the country and the aid meant for poor will never reach the poor. Of course, we have been taught that dont give men a fish but teach him to fish. Growth will give poor the method of fishing but we cant allow that so give him fish i.e. ration or subsidised foodgrains. Never mind if the foodgrains meant for him never reach him but the politician can claim to have done his deed and claim credit.

Growth also leads to higher tax revenues and can improve the fiscal situation. Putting a brake on growth ensures fiscal situation doesnt improve.

Poor fiscal situation leads to depreciation of the currency, leads to high interest rates as govt needs to borrow, leads to high inflation as govt will print money to meet non-development led deficit and lead to erratic growth, destroying the confidence of investors. We are back to pre-1996 era of Congress rule (of 50 years). And the surest sign of this was given by the Hon'ble Finance Minister who while talking about inflation and high interest rates reminded Parliament of similar situation of 1980 and how growth rebounded back the next year. Obviously when rupee depreciates, growth will rebound for a year only to retreat back the next year. I wont be surprised if we see negative growth in some quarters over next 3 years. A -25% compression in Capital Goods sector is the first sign of things to come.

It is obvious why Congress does not like India Shining slogan.

Democracy with so-called benevolent politicians practicing votebank politics is probably the worst kind of government that people can have. Dictators/fascists/autocrats at least get criticised and dont get sympathy of people but with a democratic form of government, politicians do exactly what dictators/fascists/autocrats do and get accolades for working for betterment of lives of poor. Except for a lone crusader Anna Hazare who has shown politicians in their true colours.

Icing on cake of votebank politics is the blatant and shameless legitimisation of arsonic activities by the Govt. What i am referring to is the gift of Rs 3600 crore Indu Mills to RPI Activists who illegally occupied the mills and refused to vacate it. And of course none of the political parties dare oppose this move of the government (even a feeble or token opposition is absent) for fear of backlash.

I also believe that high corruption leads to high generation of black money sucking out legitimate liquidity from the system and leading to perpetually higher rates of interest and high inflation. This is very symptomatic of pre-96 era. Interest rates came down only post-98 and this resulted in lower inflation and led to golden period of consistent high growth.

Most of the large developmental infrastructure projects like telecom, roads, power took off in the non-Congress ruled era.

The sad part is that party which helped show India's potential is plagued by infighting and failing to seize the opportunity presented by Congress. Each leader of BJP wants to become the Prime Minister (at least that is the general public perception) and therefore we dont see a coherent strategy to counter the misgovernance of the country from India's largest opposition party.

Technical View Oct 13, 2011

Markets after hitting a bottom of 15745 have risen to 17000 levels where they face multiple resistances.

First is the double top at 17200. Then are the gaps at 17358-664 and 18005-37. It has filled one gap of 16833-17000.

Markets will require tremendous strength to overcome these resistances, possibly gap ups, which looks difficult in the current environment.

On the downside levels of 16400-600 should prove crucial.

Banks and Power Sector Exposure

Bank stock valuations have been hit due to exposure to Power sector and uncertainty related to availability of fuel and PPAs. However if one looks at the groups that are developing these projects, are these worries really justified?

Biggest capacity expansion is by NTPC, followed by RPower, Adanis, Tata Power, Lanco, Jaypee, Jindals etc. Only Lanco maybe considered weaker amongst this and could cause problems to Banks. However it is foremost in terms of capacities actually commercialised and to be commercialised.

Have any of these groups really defaulted to the banks?

Ability of analysts to swing the mood of institutional investors on the basis of some theme (i guess mainly to market their research) is really amazing. Some broking houses actually held roadshows to assess the exposure of banks to power sector and impact that it would have on their earnings and balance sheet.

And for most banks exposure to power sector is less than 5% of their total advances. Power projects typically will have annuity of 25-30 years so a couple of bad years can really be made up.

After more than 25 years, i still cant understand how and why market chooses to react so violently to issues like this and completely decimate the valuations. Maybe because i belong to the school of thought who thinks equity is for the long term and quarterly earnings are less important than the long term prospects.

Europe -- Migration to where the jobs are could be the solution

There should be a simple solution to the problems of Europe. Greece can first stop paying interest on bonds (or ask for a moratorium for 1-2 years), restructure the economy (that is the difficult part, more on it follows), get back in business. Banks which get hit due to restructuring will get support/bail out from their own governments. This way nobody pays for others' sins.

In India we had massive cleaning up of the banking system in the 90s. Restructuring of bank loans happens regularly. So this solution is implementable.

The difficult part is to restructure the economy. That means creating jobs which will pay well and therefore govt support reduces. Europe including Greece are losing competitiveness in mfg. Efforts of the developed world to globalise so that access to markets in developing economy is available seem to have backfired on them as with globalisation, mfg shifted and technology transfer became easy. This problem gets exaceberated by the lifestyle enjoyed by Europeans. I have come across several comments branding Europeans as "Lazy" and "not willing to work". These are comments from Indian companies who acquired businesses in Europe and had tough time getting people to work (meaning work longer hours beyond the official working hours). Greece reportedly has severest problem here with people retiring in 40s and most people working in govt.

Maybe one solution is to export people to where there are jobs and these expats support the local economy (like the gulf employees support Kerala's economy). Given the smallness of population of Europe, the world will have enough jobs for people willing to work. China, India, Canada, Australia, Germany, France, UK, US should allow migration from the affected countries. They can have minimum visa quota.

An unusual solution but one which will work.

And then we are back in business.

Quotes Proverbs Sayings

Only in finance can an old idea be held up as novel and hugely profitable. In

fields such as chemistry or physics, progress is cumulative. In finance, progress

is cyclical. - James Grant

Budget 2010

My takes on budget:

· I I like the cut in personal income tax. It leaves a large sum in hands of consumers. With 50% of population below 25 years of age, such a large cut will spur consumption. And the recovery last year is led by consumption with companies like Nestle, P&G, HUL, Pantaloon, Asian Paints, Castrol, Hero Honda, Bharti all showing tremendous volume growth.

·

I d I don’t think the government will achieve the non-plan expenditure number. It will be overshot by 10% or so resulting in increase in fiscal deficit by 100 bps (from 550 to 650 bps).

·

St S Structural reforms are a positive.

o Govt has set up petroleum regulator and is now setting up coal regulator.

o They have also talked about reforming the judiciary and bringing down the time to settle cases from 15 years to 3 years by FY12. This can be a big positive for attracting international investors.

o They have brought oil deficit within budget and not through oil bonds. Expect some announcement on petroleum prices deregulation. Move to increase diesel prices by Rs. 2.50 is indicative of resolve to get finances in order.

o Reduction in fertiliser subsidy.

o GST from April 2011.

o New Tax code, new companies bill and new regulations for financial sectors are some of the other things which government is focussed on in an effort to deliver better governance.

· B Budget is likely to fuel inflation. I expect margins in this quarter to fall due to higher raw material prices. Increase in excise duty and petroleum prices would add to cost push inflation. Results for march quarter will be impacted due to pressure on margins across all industry segments.

· F Focus on infrastructure through PPP continues. This should ensure GDP growth of over 10% in next 2 years (my own assessment is if we get road sector right, growth could accelerate to 12% per annum in 3 years).

o We are going to see significant addition to power capacities over next 4 years.

o Roads are already upto 9 kms per day from less than a km a day and expected to reach targeted 20kms a day by June.

o Urban infrastructure projects in many cities taking off.

· R Revenue growth, specially direct taxes, maybe much greater than forecast. I remember in Chidambaram’s time direct tax revenues were growing at 40% per annum.

FM has played to the gallery by giving a fiscal deficit number which the market was looking for (though looks extremely difficult to achieve). However I would be cautious in the markets as valuations are determined by actual profits of the companies and large cap stocks are already stretched on valuations and this quarter should see significant margin pressures.

And I expect inflation to pick up significantly leading to tightening of interest rates. So watch this factors as biggest risks to markets.

Enjoy

A Lifelong pursuit of Leisure --- Aditya Puri

A lifelong pursuit of leisure
There is no management bestseller on how to optimise leisure, but we can claim to be experts on the subject after listening to Aditya Puri over a two-hour lunch at the ITC Grand Central’s Kebabs & Kurries, write
Shyamal Majumdar and Sidhartha K . The man, who has just been voted India’s best CEO in Finance Asia magazine’s annual poll of investors and analysts, says his management mantra has been inspired by a cartoon he saw in one foreign newspaper. One half of the cartoon showed the boss neck-deep in work while others outside were having a whale of a time. The other half showed the boss taking a nap while others were all glued to their computers.
“I am sure you know which half of the cartoon is my favourite,” the HDFC Bank MD and CEO says, ordering a lassi .Puri must be the only CEO in the world who doesn’t carry a mobile or laptop; leaves office at 5:30 pm sharp; doesn’t work on weekends, giving him enough time to grow exotic vegetables & fruits at his Lonavla farmhouse; takes at least one long annual leave; and skips networking dinners to pursue other interests such as listening to music and reading.
He has recently added one more must to his daily routine: Talking non-stop to his 10-month-old grandson whenever he is around. “Both of us understand each other’s language perfectly,” Puri says with a hearty laugh.
The 58-year old CEO started his drive to optimise leisure rather early in life. A brilliant student, he was deliberately lax in high school so that his father couldn’t force him into an engineering degree, pursuing which required “extra hard work”. He preferred to graduate in commerce from Punjab University and later qualified as a chartered accountant.
He also recounts how his boss at Citi once asked him whether everything was all right since he had been leaving office a bit early. Puri was then posted in Kolkata. “No Sir, I am working very hard and am in office until it’s dark,” Puri told his boss, without realising that evening descends around 4:30 pm in the eastern part of the country during winter. His boss advised him to look at his watch also before leaving.
Puri orders tandoori rotis ,assorted kebabs and achicken dish and says he is an excellent cook. Well, almost. That’s because he knows the recipes but never cooks himself as his idea of cooking is to issue instructions with a beer in hand. “Giving ideas is my job; there are better people to execute it,” he says. Not surprising, as that’s roughly the same principle he follows rigorously in his work life as well.
However, one thing he has never lacked is his passion to make it big in life and to plan for it meticulously. A young Puri quietly resented the fact that he did not have the ‘pull’ —an euphemism for contacts —that was necessary those days to get a good job. His father, an Indian Air Force officer, didn’t know anybody who could get him a good civilian job, but Puri was thrilled when his mother told him one day that he could easily count on the biggest ‘pull’ of them all. Who is that, an eager Puri asked his mother. ‘ Uparwallah ’(God) was the lady’s answer.
His heart sank then, but Puri hasn’t forgotten that conversation and feels that’s what steeled him to the fact that he has to plan his career every step of the way. He left his job as an accountant at Mahindra & Mahindra to join Citibank because he wanted to move around the world —and to stay in a flat that was as big and comfortable as his cousin’s, who was a Citi banker.
The food is delicious and Puri looks pleased with his choice of the menu. He also remembers the stunned look on his boss’s face when he chose Saudi Arabia over New York as his first foreign posting. The reason was simple: There was a 60 per cent hardship allowance for Saudi Arabia which meant that he could save his entire salary.
Later in life, he decided to go down two notches in the hierarchy to take up a marketing job as he knew an operations job alone wouldn’t take him too far in the bank. The meticulous planning paid off and he soon found himself as the country head of Citi Malaysia. The job gave him many things, one of them being a one-and-a half-acre mansion in one of Kuala Lumpur’s tony localities.
He was also one of the top 50 in Citi to get stock options.
Life, however, changed in 1994 when he met HDFC Chairman Deepak Parekh who offered him the job of heading HDFC Bank, which had just got alicence. What sealed the deal was his father’s illness (“As the eldest son, I didn’t want to live with the guilt of enjoying the material comforts of a Citi job in Malaysia when my father needed me the most”) and Parekh’s assurance that he would get a free hand to run the bank. Nothing else mattered; neither the stock options, nor the tiny Mumbai flat and the makeshift office that consisted of Puri, his table and the many rats that would often feast on the cables.
It’s time for dessert and Puri opts for mango while ordering falooda for us. We realise we haven’t spoken a word about HDFC Bank as yet and that time is running out. Puri, however, makes up for the lost time and gives a fascinating account of what he calls common-sense banking. HDFC Bank, he says, has never let a retail customer over-borrow and has not lent to companies that over-extended themselves.
The bank gets most of its funding from retail depositors, sticks to its credit standards and pricing and follows plain conservative banking. HDFC Bank has been growing at over 30 per cent every year since its inception 15 years back. Many other banks have done so, too, but unlike them, HDFC Bank has never given up its risk-reward balance. Its focus, says Puri, is neither entirely top-line nor bottom-line, but on its customer base.
The bank is also a major player in settlement of commodities and has launched a ‘Kisan Gold Card’ under which farmers who borrow money for buying seeds and fertilisers are required to deposit their produce in an accredited warehouse. The bank, Puri says, is touching people’s lives in rural areas in many other ways, one of them being the hugely successful jewellery loan scheme which monetises idle assets.
The lunch is over, and Puri returns to his favourite topic of how he has enough time on his hands — always. But dig a little deeper, and the CEO in him takes over. Despite the distance he keeps from backbreaking work, Puri says he knows exactly what is happening at each of the bank’s 1,400-plus branches. “If there is an over-withdrawal of cash at some branch, the information reaches me within an hour —wherever I am. For that, you don’t need cell phones; you only need to put proper systems in place.” Though he doesn’t attend networking dinners, he makes it a point to meet clients at their offices during office hours. “Besides, I have reached a stage in life where I don’t have to network any longer; people need to network with me,” he says, as we wait at the portico for his BMW to come in.
Quickly realising this is contrary to his leisure optimisation theory, Puri says he doesn’t need to plan for life after retirement as he has already “retired himself from work”. For a change, he doesn’t sound too convincing.
India’s top bank CEO has fine-tuned his work so efficiently that he has oodles of time for his favourite pastimes
LUNCH WITH BS ADITYA PURI