Long term solutions and one quick fix - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Long term solutions and one quick fix A  A  A
19 AUGUST 2013

The Dream Team of Manmohan Singh, P. Chidambaram, and Montek Singh Ahluwalia have brought India within reach of a nightmare.

The focus of this troika has wrongly been on:

  1. growth as a quantitative number, as opposed to growth as a legitimate market-driven means to uplift a majority of Indians;

  2. a call to revive the animal spirits, as opposed to building a fair and just society; and flashing statistics to prove their success, when all qualitative indicators of life in India have been heading south.
The further shame is that the Dream Team got caught up in the folly of the BRIC reports authored by a team of dreamers from Goldman, Sachs. For all its marketing blitz, the BRIC report was an exercise in building a laughable xl sheet. A key finding: India was on its way to being a super power just because we had a young population. But the Dream Team, dined and wined by those who attended elite educational institutions as they did, began to believe this false prophecy. As part of the egoistic advertising of the India Dream, Incredible India, and Resurgent India (and, yes, the BJP had its India Shining moment of stupidity), the troika spent too much time with western investors and too little time touring the Indian landscape and addressing the problems within India.

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Marked to market
The constant westward looking glances of this troika were akin to a puppy dog looking for someone to pat their back and fondle their neck. And, yet, they were not elected by the western investment banks and nor were they elected to represent the Indian super-rich. Their actions over the past few years have been far from building a just society: rather than punishing those responsible for some of the most outrageous scams and thefts in India's economic history, the Dream Team - and many politicians across the spectrum - have sought ways to defuse the seriousness of the theft. (Before the BJP jumps on this to make some political gain, they need to be reminded of the various scams that BJP politicians have been involved in. The difference between the BJP and the Congress is that the BJP still sends their children to local schools while the Congress has sent their heirs to study at the elite schools of the west. In the hallowed halls of these great western campuses, the younger turks have learnt the art of sophisticated theft from their class mates - many of whom have joined the Wall Street firms where they are given a platform to perfect it.)

A series of speeches over the past one year gave a momentary pause to the disillusionment with the Great India Story. That circle is now complete: Goldman Sachs has pretty much disowned India (now classified as an "underweight") and the very audiences that the Dream Team tried to placate are dumping the Indian currency (see Graph 1).

Graph 1: INR is dumped, though interest rates on 10-year Government bonds increase: (Jan 2005 - July 2013)
Source: Bloomberg

Stock markets have behaved a lot better and foreign investors have not dumped Indian shares. Despite the sharp fall in the BSE-30 Index on August 16, the Indian stock markets are still 9.6% higher than where they were on August 1, 2012 - when Chidambaram came in as Finance Minister to replace Pranab Mukherjee, since demoted to the role of President. That relative calmness in the stock markets could change. The Finance Minister - and his weekly speeches - gave some reassurance to the jittery foreign investors. Speeches may help markets stay calm and may even help markets recover for a while (see Graph 2). Eventually, the ability to quote famous poets and philosophers needs to be followed up by action. Though there some action (the increase in the price of petrol and diesel), it was not enough. The issue of deflecting any action on corruption and protecting the rich at the cost of a broader good still seem to be the pet policies of this government. When measured in USD, the BSE-30 Index has slipped by -1.8% since August 1, 2012 while the MSCI Emerging Markets has gained +3.4%.

Graph 2: The Finance Minister is now being "marked-to-market" and his reputation is shrinking.

Within this obsession of a market meltdown, there is a need to recognise that there are other countries whose currency has been whacked. The shame is that India - given its domestic economic potential - could have been saved this comparison to Brazil, South Africa, Japan and Australia.

Table 1: Japan has had a weaker currency, but a stronger stock market
Returns,From Jan 1, 2013
till Jul 31, 13
Country In local currency In USD Implied currency loss
Nikkei 225 Index Japan 32.70% 16.20% -11.40%
S&P ASX 200 Australia 11.00% -4.20% -13.60%
S&P BSE-30 India 0.80% -9.40% -8.90%
source: Bloomberg, periods ending July 31, 2013; not annualised

A quick fix for immediate, broader growth
So, how can the government revive growth - without surrendering the "capitalist path" and without enriching the crony Indian businessmen grovelling for favours at their doorsteps?

The quick fix solution is to ask all government owned PSU banks to recall their loans to property developers when they fall due and not to roll them over. The act of rolling over the debt has given the property developers (most have some connection with some politicians) the ability to hold on to their stock of unsold property - and has led to a situation where they even have the shamelessness to increase prices! The objective of the capitalist developer is to (rightly) sell at the highest price. Of course, if this was indeed a free market, the money owed to the bank by the developer would have been called in by the bank. To repay the bank loan the developer would have to sell the property at whatever price he could get. This would ensure that property becomes affordable again. But we don't live in a capitalist society; we live in a crony-capitalist India. Those with connections get what they want - the rest have to bear the cost of passing on extra profits to the crony-capitalists.

According to various news reports, there are some 4,00,000 residential apartments of various sizes and prices lying unsold across India. Assuming these were approximately 800 square feet in size and had an average price tag of Rs 3,000 per square foot, that would amount to a total of Rs. 96,000 crore in stuck value. This is about 0.1% of India's GDP which, for now, is showing up in a PSU bank as a loan to developers and subsidising the developers desire to sell in the future at a higher price for a larger profit. This Rs. 96,000 crore also represents a potential pool of money that would start a multiplier effect. If the buyers -with down payments and mortgages - were allowed to buy properties and then start buying furniture, TVs, and household goods for these new homes...maybe another 0.05% of GDP could be added from the "extras" we buy when we purchase a new home.

The Finance Minister has the power to tell the PSU banks not to renew loans to property developers or to property investors. "Unsold" properties will then be available for sale - at lower prices, because developers will be forced to sell at any price to raise the cash to repay the loans. From the banks' perspective, loans given to property developers will be repaid and loans given to individuals to buy homes will increase by a similar amount. While there will be no increase in bank loans (alas, the Dream Team will not have a rosy growth statistic to share at the next speech they give in a western country), the qualitative aspect of life will increase significantly. People who want homes will actually get a chance to own them - at affordable prices.

Gold may, as the Finance Minister says, be a "useless metal" but property unsold is a larger burden on society. Gold is owned by millions as a protection against bad government and bad governance (and we are witnessing an era of that), property is being hoarded by a few hundred developers for their benefit - using the money from millions of depositors in PSU banks!

Graph 3: Will a boom in real estate kick start GDP growth?

A recovery in growth rates of India's GDP would attract foreign investors and strengthen the stock markets and the Indian Rupee. This time it would be different. Because the benefit of that growth in GDP is being felt by the buyers of property, not by the supra-normal profits gifted to the developers and their politician partners.

The long run solutions remain the only true solutions
The immediate order to PSU banks to shut off the capital to real estate developers will see a surge in local consumption and boost growth. But this is a one-off.

The long term challenges for India are many. A few that need to be focused on are:
  1. minimising corruption in politics, in the bureaucracy, and in business;
  2. continue to find ways to subsidise the poor who cannot afford the basics (with corruption minimised, more money will flow to where it is needed);
  3. developing the villages and districts as alternate places to live to prevent urban migration;
  4. focus on public transportation, and not on private vehicles like cars (gold may be useless but it is worth something, though once you burn oil it is worth zero);
  5. give domestic retail investors the confidence to return to the Indian stock markets.
India is not in a crisis. We have been lulled into following the questionable policies adopted by our central and state governments. The real issues have been brushed aside and our silence has allowed them to be brushed aside. Wearing an arm band and lighting a candle is not how policies are changed. Forcing the issues and confronting your elected representatives is what will start the long process of change. Until then be prepared to be whipsawed between surging and falling markets.

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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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14 Responses to "Long term solutions and one quick fix"

max monteiro

Aug 28, 2013

Ajit,There is no two ways but agree with what you have penned.There are enough people working sincerely and honestly for the less fortunate. They are simply not wanted around due to vote bank politics and also he will be painted with the same brush.Should he be elected, he will not be allowed to survive among his corrupt colleagues. I want dictatorship, where most of the corrupt should be eliminated, even if it me. Let the few and the new breed live in peace. Our political system has created poverty to feed the ones in power and their generations to come. Have you not seen their money multiply in every type of market conditions, while best of money managers and people are losing money.The worst hit are the working middle class and they are not size able in numbers. The rich don't care who is in power, cause they can afford to grease the palms. It is said " you give a fish to a man, he will eat it for a day. Should you teach him to fish , he will feed himself all his life. People live an idle life and they are fed thru the PDS, and also fill the bellies of our representatives and their cronies in the bargain. Our armed forces and the law implementers have the key to our solutions. Guys, dump your so called useless masters and be your own bosses and take care of the nation.



Aug 21, 2013

It is quite naive to assume that recalling the loans will only have one outcome - which as per the author is affordable property prices!

What about those who are in genuine difficulty or are unable to sell their lot quickly? They will be forced to bankruptcy, potentially increasing NPAs of these banks (when they mark the loans to market).

Also, a lot of the small developers do not borrow from banks in the first place. They have black money from various sources circulating in property. They won't sell!

Yes, we have the most inept government in history of independent India, but all everyone seem to be doing (including other media reps, so called intellectual class)is providing a long wish list of what 'should' be done. But there doesnt seem to be any political leadership out there (in any party) who is willing to define a clear action plan and way forward!

Its nice to read such articles, but at the end of the day, its just one of the many out there, without any concrete action plan!

Like (1)

Ajit Dayal

Aug 21, 2013

My apologies on this error, Kunal! What makes it worse is that I supposedly "checkedĀ" it twice. Anyways, the thesis stands: stop protecting the developers and start allowing market forces to allow buyers to purchase their homes and jumpstart the economy.

Like (3)


Aug 20, 2013

I agree wtih points but disagree with implemenations, well that means those are not feasable. Good on paper,3rd point says develop villages/Towns this could have been implemented when Mahatma Gandhi Suggested too, if any government which allows to develop a cities reasons are plenty all can be taken into their benefits per say. Corruption cannt be beliitle because government/corruption are flip side. I may sound pessimistic for few but thats true,a lopside leadership indulged in dirty caste,religion based politics cannt think of development. Root cause, need a leader, being human being we tend to follow a lot, need may be benevolent leader, who doesnt appeases anyone except Nations growth. Which in my opninion is not present at this podium of Indian politics? Why not everthing should be allowed to automate, why not have strict laws? and not be followed. Thinking of democracy in terms of old definition will allow more corruption. Time for social Scientists to think of a new term DemAutoCapCommu , take good from everthing. Corruption eradication can solve more problems than anyother.

Like (3)

Kunal Bavishi

Aug 20, 2013

Excellent Article.

Just a small correction, the amount in real estate comes to 96,000 crore and not 9,60,000 crore.

Thank you.

Like (3)


Aug 20, 2013

while i agree with the issues you have identified, i differ on the solution proposed. the real problem is that the democratic model of governance has broken down. The way elections are run, the way politics is positioned in indian social life, it is impossible for a 'good' person to aspire to be a politican. Look around..all those who aspire to get elected are either gundas or businessmen. until we find a solution to this basic problem, i dont think a long term solution is possible.
e.g. what is the economic incentive for the politicians to force PSU banks to call back the loans? why on earth would they do it?

Like (1)

prashant maheshwari

Aug 20, 2013

80% discount on fund select

that means your product is worthless,
that means it is of zero value or negative value

Like (1)


Aug 20, 2013

I dont feel Indian politicians will prefer a slump in real estate as their fortunes are tied to it, same goes with big industrialist, big infrastructure players who have political connections.
So PSU banks will be capitalized by tax payers money, will be intresting to see the next quarter PSU banks results once the Bond MTM losses show up on balance sheets.

More than big industries facing the slowdown its the small SME which is hurt the most.

Like (1)

sanjeev bhatia

Aug 20, 2013

This article was an eye opener, never thought this angle.

Like (1)

Dr Aniruddha Malpani

Aug 20, 2013

Dear Ajit,

Very thoughtful solution.

We need to start with a single point agenda - and this is the right place to start ! Having too many solutions just confuses everyone and dilutes the focus. If you try to do too many things, nothing gets done. The beauty of your solution is that it's simple and implementable; and requires only a single person - the FM - to have the desire and courage to execute it.

Like (1)
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