Beware the animal spirits - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Beware the animal spirits A  A  A
2 JULY 2012

Indian industry must be celebrating.

The representatives of Indian industry - fondly referred to as "corporate honchos", "leading industrialists", "captains of industry", "the face of new India", or just plain "rich" - must be at the gates of heaven poised to rush in.

Since the breaking of the CWG, Adarsh, spectrum, oil and gas, iron ore, and coal scamsthe wonderful friendships and special relationships that many in the Indian industry have had with their political partners and their allies in the bureaucracy has been in the spotlight.

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And being in the spotlight means that they no new deals have happened: no progress on "resource allocation".

No "resource allocation" means that the investment in the machinery to extract the maximum value from the resources given to the industrial houses on the cheap have been on the decline.

This decline in lower purchases of machinery has resulted in a lower GDP.

If the government gave me spectrum at some 2003 price in the year 2007, it would be in my interest to buy and install as many telecom towers as I could. If my raw material price is 1/6th (as per some estimates of the CAG report), I would be a fool not to install towers to maximise the use of that spectrum.

All those telecom towers I build to transmit my spectrum require steel and cement and people to install. And once built, I would like to see it utilised so I start to spend money on advertising. And then I get customers and then I get service people to answer all their complaints and billing people to process all their payments. The people I hire and the people I buy all this equipment from for my business have their own consumption, their own economic activity.

A virtuous cycle is created. There is economic activity. GDP grows. India shines.

And, in case I forget to mention, I - the original owner of the cheap spectrum and the catalyst of the India shining story - become very rich in the bargain.I am now a US Dollar billionaire with a lot of personal wealth and a lot of money to buy more powers.

If you break that chain of free spectrum, oil and gas, iron ore and coal, and land, the economy slows down.

My market cap and wealth collapses.

And I do what I know best: get my friends in the press and TV to focus on the terrible data "coming out" of India.

This distracts from the real and important debate of how we get a sensible, sustainable, long term policy in place that allows the industrialist to pay a market price for a resource that belongs to the nation.

I frighten the nation into believing that the end of the world is upon us and we need a quick solution.

It really is that simple.

Add the fact that the global economy is in a terrible condition and you get what the industry-friendly press cooks up every day for us to devour: how India is no longer shining.

India is flat on its back and this "policy paralysis" must go.

The government needs to act. Sorry, the government that is run by the friends of industry needs to act.

So, we - the powerful industrial lobby - move things around.

The Finance Minister is now potentially the President - a useful role if there was a hung Parliament or a troublesome Chief Minister.

The Prime Minister is now also the Finance Minister.

Reviving the animal spirit

On June 27, 2012 the web site of the Prime Minister carries this press release:

PM meets Finance Ministry officials to chalk out plan for Economic Revival

Prime Minister, Dr. Manmohan Singh today met senior officials from the Finance Ministry after taking over the Finance portfolio. He stressed that reviving investor sentiment was on top of his priorities.

Here is a brief of his address to the officials:

"I happy to meet all of you in a new context with me looking after the Finance Portfolio once again. Apart from a brief spell in 2008, I have been away from the details and nitty-gritty of Finance for a long time.

Therefore, I depend on all of you to give me sound advice on not just matters relating to the Finance Ministry but all aspects of the government and the economy as a whole.

The Finance Ministry is an all-encompassing Ministry whose reach extends to every corner of the government and the nation.

The way it functions is critical for the future of millions of our countrymen who look up to the government to throw open channels for their progress, prosperity and welfare. Therefore, the Finance Ministry has a vital role in evolving economic policies which are conducive to economic growth and the overall welfare of the nation.

At the current juncture, we are passing through challenging times economically. The growth rate has taken a dip; the industrial performance is not satisfactory; things are not rosy on the investment front; inflation continues to be a problem.

On the external front, I am concerned about the way the exchange rate is going. Investor sentiment is down and capital flows are drying up.

There are some external reasons and we need to work towards making our country resilient in meeting these external challenges. However, there are many domestic reasons as well. We need to address these quickly. We need to work to get the economy going again and restart the India growth story.

In the short run, we need to revive investor sentiment, both domestic and international.

There have been many factors that have contributed to this general negative mood. There are problems on the tax front which need to be addressed. On the Financial Sector side, we need to see how we can improve matters. There are issues about the Mutual Funds industry which need to be resolved. The Insurance sector has seen a slowing down which is not normal in a country with large unmet insurance needs. This needs to be looked into.

I would like you all to work as a team on all these matters. There are some issues we must address in the short run and some in the long run. I am sure you will be able to work on both fronts.

The Finance Ministry has had a glorious tradition of doing excellent work. I expect the same from you."

Chief Economic Adviser, Dr. Kaushik Basu, Principal Secretary to the Prime Minister, Pulok Chatterjee, Secretaries in the Finance Ministry, Mr. R Gopalan, Mr. R S Gujral, Mr. Sumit Bose, Mr. D K MIttal, Mohmd. Haleem Khan and other PMO officials were present at the meeting.

Honestly, I don't like the tone of the text.

The words "revive the animal spirit" were attributed to the Prime Minister in earlier press reports. Maybe they were cleansed in the official press release. Or maybe the phrase "animal spirit" was never uttered by the PM.

It is good to note that there is recognition of the Finance Ministry's "vital role in evolving economic policies which are conducive to economic growth and the overall welfare of the nation".

But then we come to what could likely be the direction of the solutions: "things are not rosy on the investment front".


Things are not rosy because things are not "cosy".

The industrialists' stranglehold over key national resources had been broken.

Investments are down because the industrial families are not getting resources on the cheap like they did before.

An alternative structure of finding a way to make the system of handing out resources to fuel economic growth is not in place. And it doesn't look like it will be in place. Note that Sharad Pawar has been made the head of the Empowered Group of Ministers to decide the price of new spectrum. A small snippet in the newspapers (note that the really important news is always in the small 4-line corner snippets) says that the promoters of the 32 SEZ projects have sought the government for more time to implement their projects. A few weeks ago, there was another snippet on the SEZs being reinstated some favourable tax treatment that was withdrawn. Small signs of the new round of India Shining.

In the field of finance, the note says, "There are issues about the Mutual Funds industry which need to be resolved. The Insurance sector has seen a slowing down which is not normal in a country with large unmet insurance needs. This needs to be looked into."

That sounds downright scary.

If you want to protect the investors, the first thing you need to do is to clean up the way the mutual fund industry has been built. Then, after having cleansed it, you can let it loose amongst the masses.

But that is not likely to happen. The people who run the mutual funds and the banks that distribute the mutual funds have too much money at stake. Their lowered salaries and bonuses have probably caused a prolonged austerity at their homes. Unlike the helpless farmers who commit suicide (they still do), the financial services industry has a powerful voice. So, if you have some savings It may be time to hide from the army of distributors and agents who will soon come knocking at your door ready to mis-sell you products that will make them rich and make you poor.

Like the three little pigs, the revived army will huff and they will puff and they will blow your house of savings down.

Yes, the animal spirits will be back and India will be shining for those with connections to power.

Stock markets may rise but the income disparity will grow wider. The super-rich will become unbelievable rich.Till the next scandal.

The only, long-term, sustainable solution to improving investor sentiment is to have:

  1. A transparent mechanism of resource allocation in the economy which ensures that tribals and citizens get rewarded for what they own,

  2. A stable and sensible tax regime, not a regime based on vindictiveness,

  3. Sensible and transparent platforms and products that take the large savings that we generate as a nation each year and use these savings to fund the development of the economy.
No, we don't need any animal spirit.

We need humility and fairness: we need a sense of nation-building, not market-cap building.

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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4 Responses to "Beware the animal spirits"


Jul 4, 2012

I think investments are all about hope. Yes, past experiences tell you to be careful and pessimistic but to pronounce every person to be corrupt or about to be corrupt or working for the corrupt is wrong. I believe that is one of the problems with Anna's movement today.. selective criticism when as a society we are one of the most corrupt in the world.

Yes, beware but do not stop investing..



Jul 3, 2012

This speech and the recent moves are clear cut indications of preparations for next general assembly elections. After all the ruling party must collect suffecient funds / support to have a nice show (purchasing votes !!!!). Democratic model of governance world over has started to give away its shine(Economic problems in US and Europe are result of this model). The link between democracy -- capitalism --- five years elections system, no longer incetivise any practical leaders to work for long term objective of the nation. Meaning of Their "long term" is not beyond five years. There is no hope in sight for permanent solutions of identified problems of this country.



Jul 2, 2012

The way our PM is thinking about the economy of the country, nothing going to happen positive. One thing is sure our country INDIA will sink in to financial troubles very shortly if he continues as PM. It is in the interest of our country that Mr. Man Mohan leave the office of PM as soon as possible.
It is the matter of great shock that Mr. Singh does not know ECONOMY. He is not able to handle the post of PM.



Jul 2, 2012

The last statement is the most pertinent one. Since probably Lal Bahadur Shastri...none of India's leaders has had a sense of Nation Building. In fact there are no more leaders in India's polity...only politicians. Even after hoarding enough wealth for 7 generations, and having one leg in the grave, these men remain corrupt and hunger for more power. All their intellect and energies are directed only towards these. Really sad state of affairs. Our representatives no longer represent us.

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