GO! India. - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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20 OCTOBER 2008

The Chinese character for crisis, I have been told, is the same as the Chinese character for opportunity.

So, seeing that we are jumping from one crisis to the next, there must be many opportunities being presented. There is the one obvious opportunity from this crisis in the financial markets which has caused a collapse of the equity markets in India: keep on investing as the markets decline and hope to see some really serious returns in the next 16 to 22 months.

But we all know that India has some really serious problems like poverty, lack of education, lack of proper schools, and lack of homes for millions of people struggling to get a grip on the economic ladder.

Here are some ways that the crisis we read about and hear about can really be the Greatest Opportunity (GO) for India. Since we are no longer enamoured by India Shining! or Resurgent India! or !ncredible India may I introduce the all-new and inspiring GO! India. Please feel free to use GO! India for the coming election campaigns – I will accept my royalty payments in units of Quantum Long Term Equity Fund or Quantum Gold ETF.

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Housing for the poor
Many Indian mutual funds have invested in the debt instruments of companies in the real estate development business. These mutual funds are sitting on heaps of paper which, while supposedly liquid, are really not that liquid. The response of the Reserve Bank of India – and I applaud it - was typical of the responses by central banks in the rich and developed economies: flood the market with more money.

So the RBI cut the amount of money that banks have to keep with them and let loose Rs 100,000 crore into the system. Now this money will allow the banks to lend money to the mutual funds (against the illiquid debt paper that the mutual funds own) so that the mutual funds can pay back the investors who invested in their debt schemes. But in crisis there is opportunity.

On reflection, the smarter thing for the RBI to do would have been to open a Real Estate window: a facility which allows every mutual fund to submit their debt holdings in real estate companies to the RBI in exchange for cash. The RBI could then be the new owner of this real estate debt. Most of this debt is to be repaid sometime in the next 3 to 6 months. We all know that the real estate companies are in a soup. They cannot sell any property at these artificially propped up prices; they don’t have the cash to pay back the loans they took because they invested all that cash in building land banks that are now illiquid and useless; and there is no Bear Stearns, Lehman, Wachovia, Hypo Bank, or ICICI Bank willing to lend them money so easily anymore. Therefore, the real estate firms will default on the loans.

The RBI should take over a proportion of the property assets of these defaulting real estate firms and hand them over as housing colonies for low income people. Since the RBI was anywhere willing to invest Rs 100,000 crore in a bail out, this twist of a bail out will have a human purpose. With elections coming up in a few months, it will also serve as a wonderful campaign theme. Ghar banao, garibi hatao sounds like a nice slogan. You know how to pay me the royalties.

Schools for the masses
The 386 retail malls that are in Tier 1 cities and in the Tier 2 and Tier 3 towns across India are also in trouble. They were probably funded by some really big loans from the usual suspects. Since the RBI is busy shovelling cash into the ATMs of these banks and shovelling money into the banking system to retain the confidence of the public in these banks, it is time to ask for something in return.

Yes, you guessed it: the RBI should take over the loans given to all the retail malls. And then make an offer the mall owners cannot really refuse: a complete take over of the malls they have built at their cost of construction in exchange for the unpaid debt. The land cost should be assumed to be zero since much of the land was probably some favour they got along the way due to some connections. A soured asset is a useless asset – who needs the publicity of an investigation into how some now-useless land was acquired? So, the deals will be done. Let’s see, 386 malls at an average of 100,000 square feet per mall works out to 38.6 million square feet. At an average cost of construction of Rs 1,000 per square feet that works out to Rs 38.6 billion rupees as a one-time capital cost. Far less than the Rs 1,000 billion (Rs. 100,000 crore) that the RBI pumped into the banking system to rescue the illiquidity of the mutual fund industry.

These 38.6 million square feet, at an average usage of 500 square feet per classroom, means that there will 77,200 classrooms created in the country. If each class room houses 30 children, this means 2,316,000 children will finally have access to schools with a better quality of construction.

And the teachers?
That is not a problem.
If there are 77,200 classrooms, on average one classroom needs 2 teachers or supervisors per classroom, so that means a total need for 154,400 teachers and supervisors.
Not an issue. Not a problem.

The 1,900 people from Jet Airways who were fired – and then not fired – are a start. Air India may have another 10,000 to contribute. With the home loan and consumer markets in the US collapsing, there are probably a lot of unemployed BPO employees waiting for some phone to ring. Well, let’s get their numbers and call them and offer them jobs as teachers or assistants. Then there are all the tens of thousands of Direct Sales Agents (DSA) whose only job was to give everyone loans – whether they qualified or not – so that some banks could get more “market share”. Add to the pot the 2.3 million housewives and day traders who wanted to Saas, Bahu, and Sensex their way into instant wealth. Now that they are unemployed and have a lot of time on their hands, the housewives and day traders can get down to some real work helping build GO! India.

Of course, one does not wish to end up taking the risk of a generation being taught how to mis-sell loans and day trade so we need to control and structure the curriculum. Luckily, the ad campaign of mobile phone company “Idea!” with Abhishek Bachchan has solved that problem. Education via cell phones under the scrutiny of the housewives! Once the kids master the basics, they can be trained on how to greet people and smile courteously under the guidance of the Jet employees and the BPO employees. (Maybe the millions of educated people who drive cars can also enrol in those classes.) And then, finally, job prospects based on a “how to sell” course under the guidance of the unemployed DSA folks.

In this go, go world of GO! India, everyone is a winner: the unemployed get jobs under the guaranteed employment schemes and the children get to attend proper schools with job skills and career potential. And the real estate developers don’t need to repay the loans they cannot repay – they just hand over their useless land banks.

Another capital idea
India, as we know is a land of entrepreneurs. The channa-wallah seems oblivious of the communists and their grand designs of equality. Everyday he wakes up and walks the streets selling his wares. He understands his costs – and he understands how he needs to price his channa so that he can make a profit every day. But, still, life is a struggle. And there are millions of less fortunate in India. A dose of capital will go a long way in making them more comfortable. And encourage them to grow their business.

So, how we can make them really rich? By creating a People’s Note.

We have been wise enough to allow some strange group of foreign investors into the Indian stock markets under something called the “P-Note” facility. These P-Note folks have been terrible guests. They seem to be angry about something – every day when we wake up in India and watch our TV screens, all we see is them beating down our stock markets. And we are bleeding. Yet, they keep beating us down further. The only colour on our TV screens is blood red. Well, if these ungrateful P-Note folks don’t like this free ride we have given them, let’s offer the stocks the P-Notes own to the poor people in this country via a People’s Note.

When the Berlin wall collapsed twenty years ago and the communists were booted out of power in Eastern Europe a lot of the peasants and factory workers were given ownership of the state-owned enterprises. Needless to say, the poor people did not understand the potential wealth and they sold these ownership rights to a few smarter people – for nothing. These smart people are now the “oligarchs” who have become seriously wealthy – even though they have lost some USD 300 billion in the last few months. But the point is that, in those times of panic, shares were not seen to be worth anything. And as the economies of Eastern Europe and Russia recovered those shares were worth a lot. So, the RBI should lend some USD 10 billion to this People’s Fund which will buy every share that every P-Note holder wishes to sell. At the closing prices of Friday, October 17th.

There will be a one week window for this transaction: if the P-Note holder does not sell in that one week window, he is forced to hold on to those shares for the next 3 years. And no clever tricks of lending and re-lending those underlying shares through some creative financial engineering: if guilty of such practice, the P-Note holders become school teachers in those converted malls.

Over the next five years there will be immense wealth created by this People’s Note – of course, assuming that we don’t follow the PFRDA’s practice of only appointing the large money managers to manage these large assets. This wealth will be shared with everyone who has a ration card – and has not filed a tax return in the last 5 years. Plus with those who were forced out of their villages to make way for the misguided SEZ schemes.

Mending fences
Prime Minister Singh has really angered the Left Front with this nuclear deal with USA. The Left Front is really angry that India had to head west to the USA. They must be happy that Pakistan, the friendliest neighbour that any country could ever wish for, is now signing up a nuclear deal with China.

But with all these pro-poor policies of housing, schools, employment, and capital wealth creation, the Prime Minister could make the Left Front really happy. The Left Front may even nominate that their beloved Premier (uh, the one in India, that is) be granted an honorary politburo membership.

So, the next elections may be quite an anti-climax: it may be the Congress and Left Front back together again for another wonderful 5 years. That Chinese saying is so true: every crisis is an incredible opportunity. GO! India, go!

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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